Banks giving Chicago time, while state bankruptcy bill takes shape

By Karen Pierog

CHICAGO (Reuters) – Major banks that are party to Chicago credit agreements are giving the city time, despite their right to demand $2.2 billion in immediate payments after Moody’s Investor Service this week downgraded Chicago’s rating to junk.

“At this time, the city has not been informed that the counterparties intend to accelerate payments and termination fees, and we are working with our counterparties to address any issues raised by Moody’s decision,” a city source said.

JP Morgan Chase & Co is Chicago’s largest counterparty, with $880.58 million in swaps and letters of credit connected to the city, according to a March 6 city report. Wells Fargo & Co is the second-largest, with $690.975 million in swaps and letters of credit, while Bank of New York Mellon Corp is third, with $336.885 million; Bank of America Corp next, with $276.835 million, and Barclays PLC the fifth-largest counterparty, with $220 million.

Bank of America Merrill Lynch and Deutsche Bank AG declined to comment on any negotiations with the city. BNY Mellon, US Bank, Northern Trust Corp and Bank of Montreal were among several banks that did not respond to requests for comment.

Moody’s downgrade on Tuesday of Chicago’s ratings gives banks that provide credit support, or are counterparties on interest-rate swaps, the right to demand Chicago pay a total of $2.2 billion in accelerated principal, interest and termination payments, according to the credit rating agency.

“Banks will approach accelerating on their swaps very carefully,” said one banker who spoke on condition of anonymity. “They know that if they enforce their rights, the city of Chicago has many levers.” The banker said that making an enemy of the city could be dangerous to a bank relying on it for business.

The city hall source said Chicago is still pursuing efforts to convert about $800 million of variable-rate general obligation bonds to a fixed-rate mode starting later this month and eliminate swaps used to hedge interest-rate risk.

Moody’s pegged its rating action on the Illinois Supreme Court’s invalidation last week of a state pension reform law. The court found the law violated a prohibition in the Illinois constitution against reducing pension benefits.

Chicago faces a $300 million structural budget deficit and a looming $550 million mandatory hike in pension contributions beginning next year. A 2014 pension reform-law for two of its four retirement systems also is being challenged in state court.

(Reporting by Karen Pierog; Additional reporting by Hilary Russ; Editing by David Greising and Diane Craft)

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