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S&P, Fitch downgrade Chicago debt — but not to junk

Chicago's battered credit rating has taken another hit as Standard & Poor's said in a statement it lowered the status of the city's general obligation bonds two notches, to A- from A+.

Also, Fitch Ratings lowered its credit grade for Chicago to BBB+ from A- on Friday, citing “uncertainty regarding the city's liquidity,” or cash position, after a recent downgrade to junk bond status by Moody's Investors Service.

Although the two ratings agencies appeared to reference the same recent Illinois Supreme Court ruling that blocked state pension reform as Moody's Investors Service did earlier in the week, they did not lower Chicago debt below investment grade like Moody's did.

Chicago debt remains three levels above junk, S&P said. But S&P put the new rating on its credit watch with negative implications — an indication that a further cut could well come soon. Fitch's rating is three levels above junk bond status, which for Fitch begins at BB+.

In its rating, S&P strongly indicated it will be watching to see whether Chicago successfully renegotiates more than $1 billion of variable-rate debt, exchanging it for fixed-rate bonds.

The goal is “to avoid short-term liquidity pressure like the one (Chicago) is currently facing,” S&P says. “Within the credit watch period, we expect the city will address its liquidity pressures — whether through full renegotiations or through using its own internal liquidity.” Relying on the latter “could lead to further downgrades.”

Chicago's problem now is that it faces “short-term interference,” S&P said. “That said, we recognize that the city has a diverse tax base and a management team that has good policies in place. These are an important foundation for any city that needs to address the challenges that this city is facing.”

Lois Scott, the city's chief financial officer, said in a statement: “The city of Chicago's financial crisis is real, urgent, and has been decades in the making. The downgrade by Moody's of the city's credit — a decision they say was driven by the Illinois Supreme Court's reversal of the state pension reform bill — has substantially magnified the city's challenges and will add real costs to Chicago's taxpayers. In fact, S&P noted Friday that its own downgrade is driven by the short-term pressures on the city's fiscal position that were created by Moody's actions earlier this week. However, unlike Moody's, S&P recognizes the city's efforts to not only address its legacy liabilities, but that it has the right tools in place to address the challenges it faces.”

The third major agency, Fitch Ratings, has yet to address the issue.

"S&P, Fitch downgrade Chicago debt — but not to junk" originally appeared on Crain's Chicago Business, a sister publication of Pensions & Investments.