The city has managed to reduce a threatened $58 million in payments triggered by a downgrade of Chicago’s debt rating Friday, and the city may be able to avoid the expense altogether.
A spokeswoman for the mayor’s office said Wednesday that the city has lessened the potential payments by $20 million by renegotiating the terms of an agreement with BMO Harris Bank.
The city has four interest-rate swap agreements with BMO Harris and Wells Fargo that were set to terminate automatically if the city’s bond rating falls below Baa1, forcing the city to pay the full $58 million value of the contracts. Moody’s Investors Service on Friday dropped Chicago’s rating to Baa2, two notches above “junk” status, citing an overwhelming pension burden.
The city is still working to renegotiate the contracts tied to the rest of the swap deals, said Kelley Quinn, a spokeswoman for Mayor Rahm Emanuel’s administration.
In an interest-rate swap, a government agrees to make payments to a bank at a fixed rate and the bank agrees to make payments to the government based on a variable rate — over a period that can last decades. The BMO swap, which began in 2005, expires in 2038.
Banks promoted swaps in the early 2000s as a tool governments could pair with variable-rate bonds to save on borrowing costs. But falling interest rates have turned the contracts into a pricey liability for many cities.
The mayor’s office said Wednesday that Emanuel, “as part of his efforts to right the city’s financial ship,” has voluntarily paid to terminate seven swaps entered under Mayor Richard M. Daley.
Paying the termination costs triggered by the downgrade Friday would drain needed cash from the city’s operating budget, however.
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