Chicago plans to sell $806 million of bonds in the next four weeks, refinancing floating-rate debt that exposed the city to penalties after its credit rating was cut to junk.
The deals are part of a move to convert about $900 million of variable-rate debt to fixed-rate. Chicago plans to price offerings of $201 million and $182 million on May 19, according to data compiled by Bloomberg. A additional four sales totaling $423 million will follow through early June, according to Kroll Bond Rating Agency.
Moody’s Investors Service lowered Chicago’s rating to Ba1, one level below investment grade, after the Illinois Supreme Court rejected a state pension-overhaul plan last week. The ruling weakened the city’s options for fixing its own pension-system shortfall. Chicago, which has $20 billion in unfunded retirement liabilities, owes an additional $600 million to pensions next year.
The downgrade allows banks to force the city to repay floating-rate bonds early and exposes it to fees to end related derivative contracts. Moody’s said banks have the option to demand as much as $2.2 billion in accelerated principal, interest and fees.
Refinancing eliminates the risk that Chicago will have to repay the debt early, though it still faces fees to break the derivative deals.
Kroll rates the debt A-, four steps above junk, with a stable outlook. S&P rates the deals an A+, six steps above junk.