March 4, 2015 / 5:35 AM / in 4 years

Chicago in talks with banks to avert swap payments

CHICAGO, March 3 (Reuters) - Chicago has renegotiated an interest-rate swap agreement with one bank and is in discussions with another to avoid paying about $60 million in termination fees, the mayor’s office said on Tuesday.

Moody’s Investors Service on Friday cut Chicago’s general obligation rating by one notch to Baa2 - a level that allowed banks to end certain swaps the city uses to hedge interest-rate risk on its variable-rate bonds.

Mayor Rahm Emanuel’s office said the city late last week renegotiated swap terms to avoid having to pay BMO Harris Bank a required $20 million termination fee. Negotiations with Wells Fargo are ongoing over the remaining $40 million termination fee.

Spokesmen for the banks declined to comment earlier on Tuesday about the status of the swap agreements.

In its report on Friday, Moody’s said the ratings downgrade to just two steps above the junk level could trigger the immediate termination of four swap agreements, costing the city about $58 million. It also noted that the downgrade to Baa2 moves the city closer to termination of 11 more swaps deals. Termination on those contracts would potentially cost Chicago an additional $133 million, Moody’s noted.

Emanuel’s office said it inherited a debt portfolio four years ago that included $2.6 billion of variable-rate bonds along with swaps.

“Since day one in office, as part of his efforts to right the city’s financial ship, the mayor has aggressively taken steps to manage this portfolio, terminating seven swaps totaling more than $1 billion, and renegotiating another 11 swaps valued at $1.25 billion, substantially reducing taxpayer risk resulting from these inherited swaps,” the mayor’s office said in a statement.

Last week, Chicago’s ratings of A-plus with Standard & Poor’s and A-minus with Fitch Ratings were affirmed. Negative outlooks on the city’s ratings with all three credit rating agencies point to the possibility of future downgrades.

The finances of the nation’s third-biggest city are sagging under an unfunded pension liability Moody’s has pegged at $32 billion and that is equal to eight times the city’s operating revenue. The city has a $300 million structural deficit in its $3.53 billion operating budget and is required by an Illinois law to boost the 2016 contribution to its police and fire pension funds by $550 million.

Cost-saving reforms for the city’s other two pension funds, which face insolvency in a matter of years, are being challenged in court by labor unions and retirees.

State funding due Chicago would drop by $210 million between July 1 and the end of 2016 under a plan proposed by Illinois Governor Bruce Rauner. (Reporting By Karen Pierog; Editing by Jacqueline Wong)

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