KBRA Assigns AA Long-Term Rating to the City of Chicago Second Lien Water Revenue Bonds, Refunding Series 2024A; Outlook Stable
30 Aug 2024 | New York
KBRA assigns a long-term rating of AA with a Stable Outlook to the City of Chicago Second Lien Water Revenue Bonds, Refunding Series 2024A.
Second Lien Water Revenue Bonds are limited obligations of the City, secured on a second lien basis by net revenues of the System (the “System”), though ranking senior to outstanding subordinate lien Illinois Environmental Protection Agency (“IEPA”) loans. As part of the recent amendments effectuated by the amended and restated Master Indenture, the City has covenanted not to issue any obligations with a claim to Net Revenues of the Water System senior to that of the Second Lien Water Revenue Bonds. Under the new Master Indenture, only additional Second Lien Water Revenue Bonds on parity with the Bonds and obligations subordinated to the Bonds may be issued. There currently are no senior lien bonds outstanding.
Proceeds of the Second Lien Water Revenue Bonds, Refunding Series 2024A (the “Bonds”) will be used by the City to refund certain outstanding Second Lien Water Revenue Bonds for net present value savings, and to pay various costs of issuance.
Key Credit Considerations
The rating actions reflect the following key credit considerations:
Credit Positives
- Large, diverse, and stable metropolitan Chicago customer base; high quality and reliable water source with substantial excess capacity.
- Timely enactment of operational efficiencies by management that have resulted in a right-sizing of staffing levels and slowing of expense growth.
- Excellent liquidity position.
Credit Challenges
- Fluctuations in operating performance attributable to an overall trend of rising operating costs outpacing revenue growth.
- Capital intensive operation necessitating on-going investment and debt issuance, though the recent introduction of pay-as-you-go financing is a moderating factor.
- Minimal anti-leveraging security protections under bond documents.
Rating Sensitivities
For Upgrade
- Favorable progress in addressing infrastructure needs of the System, funded with a prudent mix of debt and non-debt sources.
- Moderate declines in outstanding leverage through limiting future debt issuance and more rapidly amortizing outstanding debt.
For Downgrade
- Departure of DWC from the System, without an actionable plan to recover lost revenues.
- Unanticipated capital expenses significantly beyond what is projected in CIP.
- Significant change in KBRA’s view of overall bill affordability, driven by material increases to existing fees and taxes, including the Utility Tax, and/or the imposition of new fees or taxes
To access rating and relevant documents, click here.