Fitch has assigned an 'AA-' rating to the following City of Chicago, Illinois (the city) bonds:
--$160.8 million second lien wastewater transmission revenue bonds, series 2008A;
--$32.3 million second lien wastewater transmission revenue refunding bonds, series 2008B;
--$116.0 million second lien variable rate revenue refunding bonds, series 2008C-1;
--$116.0 million second lien variable rate revenue refunding bonds, series 2008C-2;
--$100.0 million second lien variable rate revenue refunding bonds, series 2008C-3.
In addition, Fitch affirms the 'AA-' rating on the city's $631.8 million in outstanding second lien wastewater transmission bonds. The Rating Outlook is revised to Positive from Stable.
The 2008A and 2008B bonds will be sold as fixed rate bonds on a negotiated basis, with pricing expected to occur the week of Sept. 15, 2008. Proceeds from the 2008A bonds will be used to finance certain improvements to the city's wastewater transmission system (the system) and pay costs of issuance. Proceeds from the 2008B bonds will be used to refund a portion of the system's outstanding bonds and pay costs of issuance. Shortly after the sale of the 2008A and 2008B bonds, the city will sell the 2008C bonds to refund a portion of the system's outstanding bonds. Fitch will assign short- and long-term ratings based on various direct-pay letters of credit, nearer the sale date. The second lien bonds are limited obligations of the city, payable solely from net revenues of the system. The second lien bonds are subordinate in payment to the city's senior lien system bonds.
The change in Rating Outlook to Positive from Stable is based on anticipated improvement in system financial margins over the next few years. The city council approved a multi-year rate package in late 2007 which is expected to raise total annual debt service (ADS) coverage to around 1.9 times (x) by 2010 (the city's fiscal year corresponds to a calendar year), as compared to historical levels that have been near sum-sufficient. Cash balances, which have been adequate, are also expected to improve. An upgrade could result if near-term financial results are in line with current projections and ongoing estimates point towards sustained margins.
The 'AA-' rating reflects the system's limited operating risks; low customer rates; flexible, albeit rising capital improvement program (CIP); adequate fiscal results; and diverse service area. Although the system collects sanitary sewage and storm water run-off for the city, the Metropolitan Water Reclamation District of Greater Chicago (Metropolitan, rated 'AAA' by Fitch) is solely responsible for sewage treatment, disposal and flood control. Metropolitan's revenues are primarily derived from property tax levies, so the system has no direct exposure to rising wholesale costs. User charges historically have been, and are expected to continue to be, among the lowest in the country for major metropolitan areas, affording the system ample rate flexibility despite a substantial rise in the CIP this year.
The system serves a population of 2.9 million. Like many large urban systems, facility assets are relatively old, with over 70% of sewer lines placed in service before 1940. To improve the rate of rehabilitation and replacement of lines, the city has increased its amount of planned capital spending to $529 million over the five-year 2008-2012 CIP horizon from $286 million just last year. Funding for the increased outlays is expected to come in part from an increase in future borrowings, but this is not anticipated to significantly impact the system's moderate leverage ratios. The city historically has issued around $100 million of new money on a biennial basis. However, with the additional CIP costs, new money issuances are expected to average around $150 million.
Financial performance has been adequate, but ADS coverage on total debt obligations has historically been managed to around 1.0x, including transfers from the rate stabilization fund monies. To improve coverage levels and provide additional cash flow for the CIP, the city passed a three-year rate package through 2010 which will raise rates around 50% from 2007 levels. Despite these adjustments, user charges are expected to remain well below that of other major metropolitan utilities, even considering the property tax levy of Metropolitan. With the approved increases, all-in ADS coverage is expected to rise incrementally each year and approach 1.9x by 2010. Also, with the increased margins the rate stabilization fund ($14.6 million for 2007) is expected to be preserved and cash balances in general should see some strengthening.
The metropolitan statistical area (MSA) is the third largest in the nation and accounts for nearly 80% of the personal income in the state. Manufacturing remains a vital component in the MSA employment base, but it has declined and now comprises a smaller proportion of total employment than the national average. While economic fundamentals remain sound, the housing downturn has adversely impacted the local economy and the construction and financial services in particular. Year-over-year unemployment levels are indicative of the softening economic environment, with the June 2008 rate rising to 8.2% compared to 6.3% for the same period last year.
Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this underlying rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.