UPDATE 2-Banks give Chicago breathing room to convert bonds

Thu May 21, 2015 3:16pm EDT
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(Adds pricing date for bonds, lists banks providing letters of credit and swaps, amount of swap termination payments made so far by city, agreement for borrowing program)

By Karen Pierog

CHICAGO May 21 (Reuters) - Banks that entered into credit and other deals related to variable-rate debt sold by the city of Chicago have agreed not to immediately demand $2.2 billion in payments triggered when the city's rating was cut to junk by Moody's Investors Service, according to city documents.

Under new forbearance agreements with banks, the city has until June 8 to convert $805.7 million of general obligation, variable-rate debt into fixed-rate bonds, according to the amended bond documents posted on Thursday.

Moody's downgrade of Chicago to "junk" on May 12 gave banks the ability to demand a total of $2.2 billion in accelerated principal, interest and swap termination payments from Chicago. The city, the third-largest in the United States by population, is already struggling with a $300 million structural budget deficit and a looming $550 million increase for payments to its police and fire retirement funds.

Senior underwriter Bank of America Merrill Lynch will price the bonds on May 27, a city official said on Thursday.

If the conversions are not completed by June 8 or if Moody's downgrades Chicago's Ba1 rating further, the standstill agreements with the banks would end, allowing them to demand immediate payments from the city, the documents said.

The documents listed Royal Bank of Canada, Bank of New York Mellon, JP Morgan Chase & Co, Barclays PLC, and Northern Trust as providers of letters of credit that will be terminated through the debt conversions.

Goldman Sachs & Co, Bank of Montreal, Deutsche Bank , and PNC were cited as counterparties to swaps, which were used to hedge interest-rate risk on the variable-rate debt and which will end with the conversions. These banks are owed about $59.7 million in termination payments from Chicago due to the Moody's downgrade, according to the documents.   Continued...