CHICAGO -- Some rating agency officials say the prospects are improving for the Chicago-Calumet Skyway, which defaulted on its debt in 1963.
The comments followed Chicago's preliminary attempt to secure investment grade ratings for refunding debt that the city plans to issue to retire $90.2 million of outstanding defaulted bonds that are scheduled to mature on Jan. 1, 1995.
The Chicago city council's finance committee last Thursday approved the issuance of up to $110 million of revenue bonds to do a current refunding of the defaulted bonds before they mature. The full city council is scheduled to vote on the bond issue at its meeting tomorrow.
Standard & Poor's Corp. and Fitch Investors Service have issued credit opinions that the refunded bonds would achieve an investment grade rating.
Todd Whitestone, a managing director at Standard & Poor's, said the rating would be in the "low investment grade" category. In Fitch's case, no level was indicated.
Moody's Investors Service has declined to issue an opinion, pending the actual rating of the bonds.
"We did not offer that service because we want to make our opinion known to investors," said Paul Devine, a vice president and assistant director of the Great Lakes region at Moody's.
Devine said that the rating agency also has not received enough information about the toll road's traffic projections and maintenance needs "to make any kind of judgment." Moody's rates the outstanding bonds Caa, which denotes debt in "poor standing" and possibly in default.
Whitestone said that "strong demand" over the last five years for the 7.8-mile Skyway, which connects the southeast side of Chicago with the northwest corner of Indiana, indicates that net revenues would cover future maximum debt service on the 30-year bonds Chicago wants to issue.
"There's no need for any growth in net revenues to pay off the debt that's planned," Whitestone said.
Standard & Poor's rates the outstanding Skyway bonds D, to reflect their defaulted status. The lack of sufficient traffic caused a default in 1963 on $101 million of revenue bonds sold in 1955 and 1957 to build the Skyway. In 1991, the city redeemed $10.8 million of the bonds through a tender offer.
Andrea Bozzo, a senior vice president at Fitch, agreed that historical revenue levels would cover anticipated debt service on the refunded bonds. She said that the Skyway is attracting traffic from parallel roadways that are congested.
Chicago Comptroller Walter Knorr said last week that Skyway revenues have increased about 5% over the last five years. Some of the increase can be attributed to toll rate hikes won through bondholder litigation. Last August, a court-ordered increase to $2 per trip from 1.75 went into effect.
Knorr said that while the city was using conservative estimates for debt service, higher traffic due to the anticipated construction of floating casinos in northwest Indiana could push revenues beyond those estimates.
Increased usage was the main reason why a number of parties had expressed interest in privatizing the Skyway, according to Henry Mendoza, president of Gaean Capital Inc., an investment banking firm that had presented the city with a privatization plan last year.
"There is a significant difference" in traffic, Mendoza said. "I think [the Skyway] will be a huge success, which is why we wanted to [privatize] it."
Chicago officials are scheduled to meet this week with rating agency officials about actual ratings for the refunding bonds, although Knorr has said the city plans to seek insurance for the issue.
If the city were to let the bonds mature without paying bondholders, the city would face an interest rate penalty of 5% over the 3 3/8% and 4 3/8% rates on the outstanding bonds. That could affect Chicago's credit standing, Knorr said last week.
Gail Niemann, Chicago's deputy corporation counsel, said that the city believes that once the bonds are paid off, any litigation remaining from bondholders will become moot.
Ken Purcell, an attorney at Winston & Strawn, which represents bondholders, said yesterday that he has had no contact with city attorneys about the pending case. He said it would be up to bondholders to decide whether or not to drop the lawsuit that is pending in federal district court in Chicago. A status hearing on the case is scheduled before Judge James Moran tomorrow, when the city will explain the bond refunding plan, Niemann said.
Bondholders have been in court since the 1970s in an attempt to force the city to pay off the defaulted bonds. Their latest claim is that Chicago breached its fiduciary duty by depositing Skyway revenues in non-interest bearing bank account.
Niemann said that the refunding would be done pursuant to the original Skyway bond ordinance. The ordinance calls for a redemption price of 101%, plus all accrued interest if the bonds are redeemed between Jan. 1, 1989, and Jan. 1, 1995. Purcell said he has sent a memo to bondholders informing them of the city's plans to refund the bonds.
One bonds trader said that rumors of the refunding hit the market a couple of weeks ago, resulting in bids of 92 1/2 on the outstanding bonds. The trader said that since Chicago's announcement, no bonds have been out for bid.
"I guess people are holding onto them," the trader said.
