Research: Rating Action: Moody’s upgrades Chicago, IL issuer rating & GO rating to Baa3; outlook is stable

New York, November 08, 2022 — Moody’s Investors Service has upgraded the City of Chicago, IL’s issuer rating and the rating on its general obligation unlimited tax (GOULT) bonds to Baa3 from Ba1. The issuer rating reflects the city’s credit quality and ability to repay debt and debt-like obligations without consideration of any pledge, security, or structural features. Concurrently, Moody’s has upgraded the rating on the city’s water revenue bonds to Baa1 from Baa2, the rating on the senior lien sewer revenue bonds to Baa1 from Baa2, and the rating on the junior lien sewer revenue bonds to Baa2 from Baa3. The outlook is stable. At the close of fiscal 2021, the city’s outstanding debt included $3.6 billion in GOULT bonds, $2.3 billion in water revenue bonds and $2 billion sewer revenue bonds.

RATINGS RATIONALE

The upgrade of the issuer rating to Baa3 reflects the city’s substantial increase in pension contributions, including an upcoming boost to comply with the city’s new pension funding policy that targets contributing an amount sufficient to keep reported net pension liabilities from growing.

Governance is a driver of the rating action because the city has improved budgetary management through a willingness and ability to increase revenue that reduced a structural deficit and facilitated the elimination of debt-based budget maneuvers and pension cost deferrals. The Baa3 rating also considers the city’s massive economic base and sound liquidity. Despite improvement in pension funding, Chicago’s leverage and fixed costs will remain very high for many years; these challenges are also incorporated in the rating.

The Baa3 GOULT rating is at the same level as the issuer rating based on the city’s full faith and credit pledge and availability of an unlimited property tax for debt service.

The Baa1 rating on the city’s water revenue bonds closely aligns with the rating on the city’s GO bonds to reflect the position of the utility as a city department with rates established by the mayor and city council. The exposure of the water revenue bonds to the city’s credit challenges is the primary factor constraining the rating despite otherwise strong attributes of the system,including sound debt service coverage, steady investment in capital, plentiful water supply and a massive service area that extends well beyond the city.

The Baa1 rating on Chicago’s senior lien sewer revenue bonds closely aligns with the rating on the city’s GO bonds to reflect the position of the utility as a city department with rates established by the mayor and city council. The exposure of the sewer revenue bonds to the city’s credit challenges is the primary factor constraining the rating despite otherwise strong attributes of the system, including adequate debt service coverage, steady investment in capital and ample treatment capacity.

The Baa2 rating on junior lien sewer revenue bonds is positioned one notch below the rating on the senior lien sewer revenue bonds given the subordination of the pledge.

RATING OUTLOOK

The stable outlook reflects our expectation that the city will adhere to its new pension funding policy, which targets controlling the growth in the reported net pension liability, for the foreseeable future even if the cost to adhere to the policy grows. We expect the city will fund such increased costs without relying on debt base budget maneuvers. The outlook also assumes that the city’s liquidity will remain sound (issuer rating and GOULT).

The stable outlook on the city’s revenue bonds mirror the stable outlook on issuer rating because of the linkages among the ratings (water revenue, senior lien sewer revenue and junior lien sewer revenue).

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

– Declines in the scale of liabilities relative to operations (issuer rating and GOULT)

– Substantial increase in fund balance and liquidity (issuer rating and GOULT)
– Strengthening of economic indicators such as resident income, full value per capita, and real GDP growth relative to the US (issuer rating and GOULT)
– Upgrade of the city’s Issuer rating (water revenue, senior lien sewer revenue and junior lien sewer revenue)

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

– A return to pension contributions that materially trail the tread water indicator (issuer rating and GOULT)

– Significant growth in leverage (issuer rating and GOULT)
– Weakening of fund balance or liquidity (issuer rating and GOULT)
– Narrowed liquidity and debt service coverage, or substantial growth in leverage of net revenue (water revenue, senior lien sewer revenue and junior lien sewer revenue)
– Downgrade of the city’s issuer rating (water revenue, senior lien sewer revenue and junior lien sewer revenue)

LEGAL SECURITY

Chicago’s GO bonds back by the city’s full faith and credit pledge and are payable from all available revenues including a tax levy unlimited as to rate or amount.

The water revenue bonds are backed by a lien on revenue, net of operations and maintenance (O&M) expenses, of Chicago’s water enterprise. The outstanding bonds were originally issued as second lien bonds. However, following a defeasance in 2019 and closing of the senior lien, the bonds now have a priority claim on revenues.

The sewer revenue bonds are secured by either a senior lien or second lien on revenue, net of O&M expenses, of Chicago’s sewer enterprise.

PROFILE

With a population of 2.7 million, the City of Chicago is the third most populous city in the US. The city provides governmental services include public safety, public works and general governmental functions. Business type activities account for less than a quarter of city revenue and consist primarily of a regional water system, a local sewer transmission system and two major airports.

METHODOLOGY

The principal methodology used in the issuer and general obligation ratings was US Cities and Counties Methodology published in November 2022 and available at https://ratings.moodys.com/api/rmc-documents/386953. The principal methodology used in the water and sewer revenue ratings was US Municipal Utility Revenue Debt Methodology published in April 2022 and available at https://ratings.moodys.com/api/rmc-documents/386721. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

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Lead Analyst
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