Chicago finalizes JPMorgan line of credit to delay burst restructuring

Chicago has finalized short-term borrowing plans to cover $ 450 million in planned budget relief for 2020, leaving the door open to abandoning debt restructuring if new federal aid to the pandemic shifts. COVID-19 is coming to fruition.

The city will pay 1.95% for the GO loan made through a line of credit provided by JPMorgan.

A Chase sign on a Chicago office tower. A JPMorgan line of credit from JPMorgan Chase & Co. supports Chicago’s new short-term GO debt.

Bloomberg News

JPMorgan offered the lowest rate, said Kristen Cabanban, the city’s finance spokesperson. The city contacted several banks for rates on a line of credit or a note issue, and market sources said the city was under pressure to use short-term borrowing or restructure debt before a debt service payment in early January to close a 2020 budget gap.

The short-term loan, first introduced by CFO Jennie Huang Bennett at city council hearings in November, buys the city up to a year to avoid a long-term debt restructuring to completely close a $ 800 million contract. gap due to tax injuries related to the COVID-19 pandemic.

Bennett told Aldermen that the finance team “looks to plan” for repayment, restructuring and new money once they have a “better understanding of the federal landscape,” referring to both the prospects for ‘a back-up plan and a major federal infrastructure plan after the president-elect. Joe Biden takes office in January.

The latest stimulus / relief package with momentum from Congress lacks help to offset tax losses to local and state governments due to the pandemic.

Mayor Lori Lightfoot’s administration hasn’t said how it would use federal funding if it comes to fruition, but Bennett said debt restructuring was among the best options. If federal aid fails and in the absence of a new injection of revenue or a dramatic tax clawback, the city would turn short-term borrowing into a debt restructuring.

Budget 2021 relies on an additional $ 500 million to close a $ 1.2 gap with an estimated $ 800 million deficit due to pandemic strains and $ 400 million to mounting structural pressures.

The 2021 hotfix relies on $ 500 million in structural solutions and $ 700 million in one-time maneuvers like debt relief. The city is raising property taxes by $ 94 million, raising other taxes, undertaking management savings, releasing excess funding from tax increases, drawing on $ 900 million in reserves for about $ 30 million.

The 2020 hole is closed thanks to debt relief and federal funding from the CARES Act that covers eligible costs of the pandemic.

If the city implements the full repayment and restructuring plan for 2020 and 2021, relief and repayment of savings, it would add three years to the city’s debt service schedule, extend the life of the city. debt being restructured for eight years and would add $ 1 billion to future debt service. The traditional repayment will generate enough savings to mitigate the present value penalty, so the overall transaction is expected to generate around $ 30 million in present value savings.

Last month, the board approved the $ 12.8 billion budget which includes a $ 4 billion corporate fund and a total borrowing authority of $ 3.9 billion.

The council authorized up to $ 1.6 billion in new money bonds over the next three years to support a proposed $ 3.7 billion investment plan. Restructuring and repayment authorization totals $ 1.9 billion under Sales Tax Securitization Corp. general obligation and debt. and plans to issue most under the junior privilege of STSC. About $ 950 million of the $ 1.9 billion is the scoop-and-toss. An additional $ 400 million repayment authorization gives the city leeway if it chooses to incur debt or if additional repayment candidates are available, bringing the total authorization to $ 3.9 billion.

Bennett defends the scoop-and-toss as preferable to using reserves as the city tries to preserve its bond ratings, future flexibility to handle pandemic spending and losses and stay on track to achieve structural balance by 2023.

Moody’s Investors Service recently confirmed the city’s GO rating which is a cut below the investment grade and Fitch Ratings confirmed the city’s rating which is a cut above the junk. Both now attribute a negative outlook and their reviews followed the release of the budget. S&P Ratings rates the GO BBB-plus with a negative outlook. He shifted the outlook to negative earlier this year.

Kroll Bond Rating lowered the outlook for its A rating to negative, from stable on Tuesday.

“The negative outlook reflects a constrained income environment, induced by COVID-19, with uncertainty as to when the economic impact of the pandemic will abate. an escalation in pension funding needs is looming, ”Kroll said.

Municipal Market Analytics warned this month in a weekly report that the restructuring adds to the city’s credit and spread risk, so the use of potential future federal aid to reverse all or part of the restructuring could benefit bondholders.

“Although most state and local borrowers use one-off repayments to create short-term fiscal space, the financial deal originally proposed by Chicago would hurt debt servicing a lot, almost surely at the expense of flexibility.” financial and budget. balance. Chicago bondholders should expect a higher risk of downgrading and / or widening spreads in the coming months, ”MMA said.

The city’s post-repayment / restructuring debt covering GO and STSC credits will total $ 11 billion.

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