KBRA Assigns Long-Term Rating of AA- to the City of Chicago Second Lien Wastewater Transmission Revenue Bonds, Refunding Series 2024A ; Outlook Stable
11 Mar 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 2024A. 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 was assigned because of 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 operational efficiencies.
- Healthy liquidity in each of the last five 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 62.9% at FYE 2022, down only modestly from 71% at FYE 2021.
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 liquidity.
- Unfavorable service area demographic trends leading to reduced rate-setting flexibility.
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