NEW YORK--()--On the effective date of Oct. 2, 2012 , Fitch Ratings will (i) upgrade the long-term rating to 'AAA', Stable Outlook, from 'AA+', Stable Outlook, and upgrade the short-term rating to 'F1+' from 'F1' assigned to the City of Chicago general obligation variable rate demand bonds Neighborhoods Alive 21 Program, series 2002B-3 (the Series 2002B-3 bonds), and (ii) confirm the long-term rating of 'AA+', Stable Outlook, and confirm the short-term rating of 'F1+' assigned to the City of Chicago general obligation variable rate demand bonds Neighborhoods Alive 21 Program, series 2002B-5 (the Series 2002B-5 bonds).
The ratings actions are in connection with: (i) the substitution of the irrevocable direct-pay letter of credit (LOC) previously provided by Bank of America, N.A. (rated 'A/F1', Stable Outlook) with a substitute LOC issued by Royal Bank of Canada, acting through its WFC, New York, Branch (Royal Bank of Canada; rated 'AA/F1+', Stable Outlook) for the series 2002B-3 bonds; and (ii) the substitution of the LOC previously provided by The Northern Trust Company (rated 'AA-/F1+', Stable Outlook) with a substitute LOC issued by The Bank of New York Mellon (BNYM; rated 'AA-/F1+', Stable Outlook) for the series 2002B-5 bonds.
The long-term ratings will continue to be determined using Fitch's dual-party pay criteria and will be based jointly on the underlying rating assigned to those bonds by Fitch (currently rated 'AA-', Stable Outlook), and the support provided by the respective substitute LOC. The short-term 'F1+' ratings for both series will be based solely on the respective substitute LOC. For information about the underlying credit rating for the City of Chicago see Fitch's new issue report dated April 30, 2012, which is available at 'www.fitchratings.com'.
Fitch's dual-party pay criteria consider the likelihood of the failure of both a rated obligor and a bank LOC provider. The methodology results in a long-term rating that is up to two notches higher than the stronger of the two credits if the following conditions are met: (1) both entities have a rating of 'A' or higher; (2) the transaction is structured such that payments from both the municipal issuer and the bank are in the flow of funds and both entities would have to fail to perform before the bonds defaulted; and (3) the credit of the bank and the rated obligor have no more than a medium degree of correlation. Fitch has determined (i) a low degree of correlation between Royal Bank of Canada and the obligor which results in a rating of 'AAA' for the series 2002B-3 bonds, and (ii) a low degree of correlation between BNYM and the obligor which results in a rating of 'AA+' for the series 2002B-5 bonds. If either the underlying bond rating or the related bank rating were downgraded to 'A-' or lower, the dual-party pay criteria could no longer be applied to the applicable series, and the long-term rating assigned to the related series would then be adjusted to the higher of the related bank rating and the underlying bond rating.
Pursuant to the substitute LOCs, each bank is obligated to make regularly scheduled payments of principal of and interest on the applicable series in addition to payments due upon maturity and redemption of the related series, as well as purchase price for tendered bonds for the related series. The ratings will expire upon the earliest of: (a) (i) for the series 2002B-3 bonds, Oct. 2, 2015, the initial stated expiration date of the substitute Royal Bank of Canada LOC, unless such date is extended, (ii) for the series 2002B-5 bonds, Oct. 2, 2015, the initial stated expiration date of the substitute BNYM LOC, unless such date is extended; (b) conversion to a mode other than daily or weekly; (c) any prior termination of the related LOC; and (d) defeasance of the related series of bonds.
For the series 2002B-3 bonds, the substitute Royal Bank of Canada LOC provides full and sufficient coverage of principal plus an amount equal to 45 days of interest at a maximum rate of 12% based on a year of 365 days and purchase price for tendered bonds, while in the daily or weekly rate mode; for the series 2002B-5 bonds, the substitute BNYM LOC provides full and sufficient coverage of principal plus an amount equal to 35 days of interest at a maximum rate of 12% based on a year of 365 days and purchase price for tendered bonds, while in the daily or weekly rate mode. A mandatory tender of both series of bonds will occur on Oct. 1, 2012, prior to the actual substitution date of Oct. 2, 2012. The Remarketing Agent for each series continues to be William Blair & Company L.L.C.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'U.S. Municipal Structured Finance Criteria', February 28, 2012;
--'Rating Guidelines for Letter of Credit-Supported Bonds', June 20, 2012,
--'Dual-Party Pay Criteria for Long-Term Ratings on LOC-Supported U.S. Public Finance Bonds', March 9, 2012.
Applicable Criteria and Related Research:
U.S. Municipal Structured Finance Criteria
Rating Guidelines for Letter of Credit-Supported Bonds
Dual-Party Pay Criteria for Long-Term Ratings on LOC-Supported U.S. Public Finance Bonds