Funds News

UPDATE 2-Banks give Chicago breathing room to convert bonds

(Adds pricing date for bonds, lists banks providing letters of credit and swaps, amount of swap termination payments made so far by city, agreement for borrowing program)

CHICAGO, May 21 (Reuters) - Banks that entered into credit and other deals related to variable-rate debt sold by the city of Chicago have agreed not to immediately demand $2.2 billion in payments triggered when the city’s rating was cut to junk by Moody’s Investors Service, according to city documents.

Under new forbearance agreements with banks, the city has until June 8 to convert $805.7 million of general obligation, variable-rate debt into fixed-rate bonds, according to the amended bond documents posted on Thursday.

Moody’s downgrade of Chicago to “junk” on May 12 gave banks the ability to demand a total of $2.2 billion in accelerated principal, interest and swap termination payments from Chicago. The city, the third-largest in the United States by population, is already struggling with a $300 million structural budget deficit and a looming $550 million increase for payments to its police and fire retirement funds.

Senior underwriter Bank of America Merrill Lynch will price the bonds on May 27, a city official said on Thursday.

If the conversions are not completed by June 8 or if Moody’s downgrades Chicago’s Ba1 rating further, the standstill agreements with the banks would end, allowing them to demand immediate payments from the city, the documents said.

The documents listed Royal Bank of Canada, Bank of New York Mellon, JP Morgan Chase & Co, Barclays PLC, and Northern Trust as providers of letters of credit that will be terminated through the debt conversions.

Goldman Sachs & Co, Bank of Montreal, Deutsche Bank , and PNC were cited as counterparties to swaps, which were used to hedge interest-rate risk on the variable-rate debt and which will end with the conversions. These banks are owed about $59.7 million in termination payments from Chicago due to the Moody’s downgrade, according to the documents.

Chicago disclosed in bond offering documents it has so far paid $139.5 million to terminate 12 swaps, with the payments to be funded from its short-term borrowing program and other city funds.

The city also said it has forbearance agreements that end on Sept. 30 with banks participating in the borrowing program. The banks are BMO Harris, Bank of America, Morgan Stanley , Barclays, and JP Morgan. Chicago has tapped $588 million of its $700 million in borrowing authority and is in discussions with banks to increase the program to $1.1 billion, the documents said.

The city had planned to begin the bond conversions this week, but delayed an initial offering to evaluate options for lowering its borrowing costs.

The city’s bonds have been trading at yields about 300 basis points over the U.S. municipal bond market’s benchmark triple-A scale.

While Chicago had originally tapped Ramirez & Co and Siebert Brandford Shank & Co to head up the underwriting of two of the issues, Bank of America Merrill Lynch will now be the senior manager for the bond conversions, according to the bond documents posted on MuniOS. (Reporting by Karen Pierog; Editing by Jeffrey Benkoe, Andrew Hay and Frances Kerry)