KBRA Assigns AA Rating, Stable Outlook to City of Chicago Water Revenue Bonds Series 2026ABC
17 Apr 2026 | New York
KBRA assigns a long-term AA rating to the City of Chicago (the City) Water Revenue Bonds Project Series 2026A, Refunding Series 2026B (Forward Delivery), and Refunding Series 2026C (the Bonds). Concurrently, KBRA affirmed the AA rating for the City's outstanding Water Revenue Bonds. The Outlook is Stable.
The Bonds are limited obligations of the City, secured by a pledge of and lien on, and payable solely from, the Net Revenues of the City's Water System (the System). Debt service is senior and paid prior to debt service on any outstanding subordinate lien Illinois Environmental Protection Agency (IEPA) loans. Proceeds of the 2026A Bonds will finance aspects of the City’s capital improvement program (CIP) and pay costs of issuance. Proceeds of the Series 2026B bonds will refinance certain outstanding Bonds and pay costs of issuance. Proceeds of the Series 2026C bonds will be used to repurchase and cancel by means of a tender offer certain outstanding Bonds and pay costs of issuance.
Key Credit Considerations
Credit Positives
- The System accesses an abundant source of fresh water with significant treatment capacity to maintain service to a large and diverse service area.
- Already enacted program of annual rate increases tied to the lesser of inflation or 5% provides confidence the System will maintain sound operating margin and debt service coverage levels.
- Moderate debt burden with above amortization and declining annual debt service requirements provides flexibility to accommodate future borrowing needs.
Credit Challenges
- Large capital program to update System facilities and address required replacement of lead service lines.
- Potential loss of largest wholesale customer if unable to come to agreeable commercial terms before current contract expires in 2041.
- Potential margin and coverage pressures resulting from increased operating costs tied to tariff and geopolitical uncertainty.
Rating Sensitivities
For Upgrade
- Sustained improvement in coverage of annual debt service from current year revenues meaningfully above current levels.
- Progress in addressing System capital needs and regulatory requirements in a financially prudent manner.
For Downgrade
- Failure to maintain current practice of annual rate increases resulting in material erosion of operating margins, liquidity, and debt service coverage.
- Diminished rate affordability resulting from unplanned, significant increases in operating costs or in capital expenses.
- Departure of suburban wholesale customers resulting in meaningful loss of revenues to be made up from remaining wholesale and retail customers.
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