STUMP » Articles » Chicago Bonds -- Welcome to Junkville, Population: You » 13 May 2015, 13:05

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Chicago Bonds -- Welcome to Junkville, Population: You  


13 May 2015, 13:05

Surprising nobody, a bunch of credit announcements have been made in light of last Friday’s court ruling.

Here we go: Moody’s downgrades Chicago to junk status:

Moody’s downgraded Chicago’s credit rating down to junk level “Ba1” from “Baa2.”

The announcement, which the ratings agency released Tuesday afternoon, cited a recent Illinois court ruling voiding state pension reforms. Moody’s said it saw a negative outlook for the city’s credit.

Following that May court decision, Moody’s said it believes that “the city’s options for curbing growth in its own unfunded pension liabilities have narrowed considerably.”

Ya think?

Rahm Emanuel has been trying to happy-talk the ruling, as downgrades (which was known to be coming) have some financial repercussions right now:

The Moody’s report also gave the city a “negative” outlook, indicating further downgrades could be coming. In addition, the ratings agency indicated the downgrade could prompt lenders to demand up to $2.2 billion in immediate principal and interest payments.

To be sure, that $2.2 billion will not be forthcoming. I happened to look up some Chicago budget numbers this morning.

The total appropriations (for everything) proposed for the 2015 budget was just under $9 billion. That includes stuff like issuing bonds. With its then-investment-grade rating.

They will not be able to pony up $2.2 billion. Even the creditors know this. They would rather get their money…. eventually, rather than never.

But never is also a possibility.

Let’s see what Mish has to say:

Irresponsible to Tell the Truth

Apparently it’s irresponsible to tell the truth: Chicago is broke and its pension system is insolvent.

The Chicago Board of Education (CBOE) is already on the hook for $600 million in various termination fees when the CBOE debt was downgraded. Now the city itself is junk, and rightfully so.

If Emanuel disagrees, then what are his ideas to fix the problem?

Oh, I remember, Emanuel wants the state to bail out the CBOE.

Here’s a question I keep asking: How is a state that has a $9 Billion Budget Deficit Hole going to bail out a single school district that is $1.5 billion in the hole?

It’s like numbers have no meaning to these people.

I always got creeped out by people who act as if numbers were magic. “Hey! We’ll do this one neat trick! VOILA!”

So here’s something interesting. Chicago cannot declare bankruptcy without action by the Illinois state legislature. And that legislature has the pension ruling for the state to deal with, at the same time. But the state is not in any swaps that have downgrade triggers (that I know of).

These interest rate swaps are of that family of “one neat trick!” which works only if you are legitimately hedging as opposed to making a bet on the direction of interest rates and hoping the bet works out. It does not make the insolvent magically solvent.

The problem is, the counterparties on these swaps want to make sure they get paid, and they generally put in covenants that are stronger than regular bonds (because you never know which direction the cashflows will go in a swap). If counterparty A looks like it’s not going to be able to keep up payments (usually triggered by credit downgrade), the counterparty B wants the deal unwound.

But Chicago can’t really afford to unwind those deals.

Maybe, just maybe, they shouldn’t have been allowed to enter those deals in the first place?

I mentioned those swaps back in March.

This is what Moody’s says in its press release.

WHAT COULD MAKE THE RATINGS GO UP (or revise the outlook to stable)

- City or state actions that halt the growth of the city’s unfunded pension liabilities

- Revenue growth and/or reductions in other operating expenditures that enable the city to accommodate increased pension costs into annual operating budgets

- Demonstrated legal separation of pledged revenue from the city’s general operations (sales tax and motor fuel tax ratings)


– Determination by a court of law that the current statute governing the city’s Municipal and Laborer plans is unconstitutional

- Continued growth in the debt and/or unfunded pension liabilities of the city and/or overlapping governments

- Narrowing of the city’s fund balances and liquidity

The item I bolded is why Chicago is on negative outlook. Moody’s isn’t even assuming the court case will go against Chicago (though it will).

If you read the press release, you will also see that different Chicago-related bonds get different ratings — not all are below investment grade (i.e. junk).

The downgrade in February was bad enough, but this is a threshold crossing that will require more immediate action.

It will be interesting to see if the Illinois legislature actually does anything about this.

Compilation of Chicago posts.

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