KBRA Assigns Long-Term Rating of AA- to the City of Chicago Second Lien Wastewater Transmission Revenue Bonds, Refunding Series 2024B; Outlook Stable
12 Nov 2024 | New York
KBRA assigns a long-term rating of AA- with a Stable Outlook to the City of Chicago Second Lien Wastewater Transmission Revenue Bonds, Refunding Series 2024B. The long-term rating reflects the Wastewater System’s strong financial flexibility, historically stable operating performance, and the favorable characteristics of the large and diverse service area. Concurrently, KBRA affirms the long-term rating of AA- with a Stable Outlook on the City of Chicago's parity Second Lien Wastewater Transmission Revenue Bonds.
The Second Lien Wastewater bonds are limited obligations of the City of Chicago (“the City”), payable solely from a second lien on net revenues of the sewer revenue fund.
Key Credit Considerations
The rating actions reflect the following key credit considerations:
Credit Positives
- Large, diverse, and stable City of Chicago customer base and track record of providing reliable sewerage, drainage collection and conveyance service.
- Strong debt service coverage levels generated by consistent rate increases and the effectuation of operational efficiencies.
- Healthy liquidity in each of the last six years.
Credit Challenges
- Lack of a debt service reserve fund (DSRF), and a relatively weak (1.1x) rate covenant.
- High leverage, evidenced by a debt-to-plant ratio of 67% at FYE 2023, coupled with a robust multi-year CIP highlighting the projected issuance of an estimated $930.1 million in parity new-money debt through 2028.
Rating Sensitivities
For Upgrade
- Material, sustained reduction in leverage.
For Downgrade
- Failure to implement timely rate increases leading to declines in debt service coverage and/or constrained levels of unrestricted liquidity.
- Unfavorable service area demographic trends leading to reduced rate-setting flexibility and affordability.
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