KBRA Affirms AA Rating with Stable Outlook for City of Chicago, IL Second Lien Water Revenue Bonds
29 Aug 2025 | New York
KBRA affirms the long-term rating of AA with a Stable Outlook for the City of Chicago, IL Second Lien Water Revenue Bonds. The City’s Second Lien Water Revenue Bonds (the Second Lien Bonds) are limited obligations of the City, secured by a pledge of and lien on the Net Revenues of the System after payment of debt service on any Senior Lien Bonds. Under the amended and restated Master Indenture, the City covenants not to issue any obligations with a claim to Net Revenues of the Water System senior to that of the Second Lien Water Revenue Bonds. As there are no Senior Lien bonds outstanding, the Second Lien bonds effectively have senior lien status.
Key Credit Considerations
Credit Positives
- The System accesses an abundant source of fresh water with significant treatment capacity to maintain service to a large and diverse service area.
- Already enacted program of annual rate increases tied to the lesser of inflation or 5% provides confidence the System will maintain sound operating margin and debt service coverage levels.
- Moderate debt burden with above amortization and declining annual debt service requirements provides flexibility to accommodate future borrowing needs.
Credit Challenges
- Large capital program to update System facilities and address required replacement of lead service lines.
- Potential loss of largest wholesale customer if unable to come to agreeable commercial terms before current contract expires in 2041.
- Potential increases in operating costs tied to tariff and geopolitical uncertainty could pressure operating margins and coverage levels.
Rating Sensitivities
For Upgrade:
- Sustained improvement in coverage of annual debt service from current year revenues meaningfully above current levels.
- Progress in addressing System capital needs and regulatory requirements funded with a prudent mix of debt and non-debt sources.
For Downgrade:
- Failure to maintain current practice of annual rate increases resulting in material erosion of operating margins, liquidity, and debt service coverage.
- Significant increase in operating costs or in capital expenses beyond what is currently contemplated that diminish rate affordability.
- Departure of suburban wholesale customers resulting in meaningful loss of revenues to be made up from remaining wholesale and retail customers.
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