How Cash-Strapped Chicago Snagged a Triple-A Rating for Its New Bonds

Since the city of Chicago is apparently no longer considered to be insurable by the bond insurance industry (cf. https://www.wsj.com/articles/for-some-bond-investors-chicago-isnt-their-kind-of-town-1427926688), it has had to turn to other means for making its debt attractive to investors. The latest scheme involves issuing new bonds through a new (and separate) legal entity called the Sales Tax Securitization Corporation (STSC). The bonds offered by STSC are collateralized by a dedicated first claim to the city’s sales-tax revenue. Apparently similar strategies have been employed two years ago by the city of Detroit, throughout the past decade by Puerto Rico and 40-some years ago by New York City.

Interestingly, the bond rating agencies are somewhat split about the extent to which a so-called “dedicated first claim” to Chicago’s sales-tax revenues would obtain in the event of default; this divergence of opinion is reflected by the ratings given on these bonds; e.g., Fitch and Kroll gave STSC a AAA rating, whereas S&P scores it two grades lower.

Chicago has created a new company to sell the debt, offering a tempting pledge to investors: a dedicated first claim to the city’s sales taxes.
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