Moody’s wraps up ratings review triggered by Puerto Rico ruling


Chicago’s recent defeasance of its remaining senior-lien water bonds resolved a review Moody’s Investors Service launched in May that included eight utility and special district credits nationwide as a result of an appellate court ruling on Puerto Rico special revenue bonds that has shaken the market.

Moody’s issued a report this week confirming the Baa2 rating on $1.2 billion of Chicago’s second-lien water revenue bonds that it rates.

Chicago’s Jardine water plant. The city has no current plans to issue water revenue debt on its senior lien.

Marco Verch

“The city does not have any senior lien water revenue debt outstanding following a recent defeasance. This action concludes a review for possible downgrade undertaken on May 13, 2019. The outlook is stable,” Moody’s said.

Although the senior lien remains open, city officials have publicly indicated there are no plans to issue debt under it, Moody’s said.

Confirmation of the Baa2 rating is driven primarily by the close government linkage between the city and its water enterprise system. Moody’s rates Chicago’s general obligation bonds Ba1.

“The connection to the GO is the primary factor constraining the rating to Baa2 despite otherwise strong attributes of the system, which include strong debt service coverage and steady investment in capital supported by recent rate increases, ample water supply and treatment capacity and role as a provider of essential services,” Moody’s said.

Moody’s has now resolved its assessment of seven water/sewer utilities and one special assessment district with a total of $13.8 billion of rated debt that were placed on review for downgrade May 13.

The decision was driven by the three-to-four-notch positive rating differential between the utility/special district ratings and those of the general obligation or issuer ratings of the parent governments.

“These large differentials potentially over-weight the standalone credit strength of the utility enterprise or special assessment district,” Moody’s said in the May announcement.

The review considered economic, governance, and financial interdependencies between the affected entities and their “parent” governments, and whether those interdependencies detracted from credit quality.

The concerns were spurred by the March 26 ruling by the 1st Circuit Court of Appeals that upheld the district court’s conclusion that the Commonwealth of Puerto Rico was not required to pay special revenue debt service the Puerto Rico Highway & Transportation Authority’s bonds during its Title III proceedings.

The 1st Circuit affirmed the lower court’s decision that held special revenues pledged to revenue bondholders are only exempt from the automatic stay that halts creditor payments if the municipality voluntarily pays the special revenues to bondholders.

While the ruling only impacts those states and the commonwealth that are within the 1st Circuit it does have broader implications as the decision marked the first time that an appellate-level court has addressed the issue of whether pledged special revenues must be paid to bondholders in a municipal bankruptcy or restructuring process, Moody’s said.

“The uncertainty regarding the interpretation of special revenue resulting from the federal appeals court ruling underscores the importance of the linkage between a local government’s general credit quality and that of its enterprises,” Moody’s said.

Also under review were Cleveland water senior bonds; Dallas waterworks and sewer enterprise bonds; Granite City, Illinois, wastewater treatment plant bonds; Lynn Water and Sewer Commission, Massachusetts; Sheffield, Alabama, Electric Enterprise; and Center City District, Pennsylvania, which all enjoyed ratings three notches above the sponsoring government.

Monroe County Water Authority, New York, was also on review for its four-notch differential.

The Cleveland, Dallas, Granite City, and Center City ratings were downgraded. The Lynn, Sheffield and Monroe County bonds were affirmed.

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