Illinois toll debt feels effect of Puerto Rico special revenue ruling

BY SourceMedia | MUNICIPAL | 05/13/19 01:49 PM EDT By Yvette Shields

The Illinois toll highway agency’s $6.1 billion of debt is among credits facing scrutiny after an appellate court ruling in Puerto Rico’s bankruptcy that has thrown into question the long-standing assumption that special revenue pledge bonds will continue to be paid during bankruptcy proceedings.

Moody’s Investor’s Service placed the Illinois State Toll Highway Authority’s Aa3 rating under review for a downgrade Friday.

Moody's (MCO) followed up Monday by placing seven water/sewer utilities and one special assessment district under review for downgrade for the same reason, affecting approximately $13.8 billion in outstanding rated debt.

The U.S. Court of Appeals for the 1st Circuit ruling related to the Puerto Rico Highways and Transportation Authority bonds “calls into question the strength of credit separations between a general government and its enterprises and component units,” Moody’s wrote.

The review will consider economic, governance, and financial interdependencies between the authority and state and to what extent they might pose risks to the authority in a way that impacts credit quality.

Moody’s rates Illinois’ general obligation debt at the lowest investment grade level of Baa3 with a stable outlook.

“The range of potential outcomes include a downgrade of the ISTHA's credit which may be one or more notches to stabilizing the outlook at the current rating level,” Moody’s said.

The eight agencies placed on watch Monday are: Chicago's water enterprise, with senior debt rated Baa1, three notches above Chicago's Ba1; Cleveland's water enterprise, the senior debt of which carries Moody's Aa1 rating, where Cleveland is rated A1; the Aa1-rated Dallas Waterworks and Sewer enterprise, where Dallas is A1; The Granite City, Illinois, wastewater treatment plant, rated A1 where the city of Granite City is Baa1; the Lynn Water and Sewer Commission, Massachusetts, rated A1 where the city of Lynn is Baa1; the Sheffield, Alabama, Electric Enterprise, rated Aa3 where the city is rated A3; the Center City District of Philadelphia, rated Aa2 where Philadelphia is A2; and the Monroe County Water Authority, New York, rated Aa2 where the county is A3.

The appellate court released its decision on March 26 in a case brought by Assured Guaranty Corp. and three other bond insurers challenging the decision from the district court judge overseeing Puerto Rico Title III proceedings.

The judge had ruled payment of special revenues are voluntary, rather than mandatory as has been the long-standing tradition in Chapter 9 proceedings. The 1st Circuit affirmed that decision and held that special revenues pledged to revenue bondholders are only exempt from the automatic stay that halts payments to creditors if the municipality voluntarily pays the special revenues to the bondholders.

The tollway authority sought to distinguish its debt structure from the Puerto Rico debt that was subject to the ruling. The authority has stressed as Illinois' ratings slid that the state constitution, statutes and bond indentures establish a firewall between the state and authority.

“While we appreciate Moody’s role in providing credit ratings, its review is predicated on a legal case in Puerto Rico that bears little, if any, resemblance to the tollway’s situation. This is a promising time for the state of Illinois with an administration that has made fiscal stability a priority,” the statement issued Monday read.

The authority also underscored the inability of the state to file bankruptcy under existing federal law and the location of Illinois outside the 1st Circuit. Such rulings are not considered precedent in other circuits but can be cited by judges for guidance.

Moody’s acknowledged the authority’s points but said uncertainties remain.

“While the court's jurisdiction is only the Commonwealth and those states that are within the 1st Circuit no appellate-level court has addressed the issue of whether pledged special revenues must be paid to bondholders in a municipal bankruptcy or restructuring process until now,” Moody’s said.

The tollway’s authorizing legislation restricts the use of excess revenues for tollway purposes only. Voters in 2016 also approved a constitutional amendment lockbox on transportation related revenues for transportation related use only.

“Taken together, this had provided sufficient independence to support the wide differential to the state's rating,” Moody’s said of its current rating position. “During the review period, Moody's (MCO) will determine the degree to which the authority's rating should have a closer linkage to the rating of the state given the 1st Circuit ruling and what it may mean to the relationship between municipal governments with materially higher rated enterprises.”

Ahead of a tollway bond sale late last year, Fitch Ratings affirmed its AA-minus rating, S&P Global Ratings affirmed its AA-minus rating and Moody’s affirmed its Aa3 rating. All assign a stable outlook. The yield on the 10-year in the tollway's December sale landed at 2.78%, a spread of 38 basis points to the Municipal Market Data's top-rated benchmark.

Earlier this year, the authority board and leadership underwent a shake-up to reflect the change in the governor’s office to J.B. Pritzker, a Democrat, from Bruce Rauner, a Republican.

The tollway plans $704 million in 2019 capital spending as part of the ongoing 15-year, $12 billion Move Illinois program that began in 2011 and was expanded in 2017 to $14.3 billion.

Fitch last month placed seven special revenue ratings on negative watch — including four large school districts in California, Chicago Public Schools, and portion of Chicago’s water debt — as a result of the Puerto Rico ruling.

The watch signaled the expectation that the "special revenue" ratings would be downgraded closer to the issuer default ratings if the decision limiting the protections afforded by special revenue status were to stand.

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