Chicago faces huge cost to avoid financial collapse

Crain's Chicago Business reports:

As City Hall races to avoid a financial collapse, the first indications are coming of how big the hit to Chicago taxpayers will be, and the figure indeed is eye-popping.

According to Chicago's Bill Brandt, a municipal finance expert who was involved in the recent Detroit bankruptcy, the market probably will allow Chicago to refinance up to $2.2 billion in variable rate debt, short-term loans and swaps that now are subject to demand for immediate repayment, thanks to the decision by Moody's Investors Service earlier in the week to drop Chicago debt to junk level. "My sense is that this is a situation where serious people will be sobered by the consequences of preemptory action," said Brandt, who is president of Chicago-based DSI and served two stints as chairman of the Illinois Finance Authority.

But there will be a price, Brandt said. The cost "could be as much as a couple of hundred basis points," more than Chicago normally would have to pay.

So, if the city proceeds with plans to begin refinancing up to $900 million in variable-rate debt next week, trading relatively low-cost callable debt for higher priced long-term bonds, the extra cost could be as much as $18 million a year, by Brandt's calculations.

And that's just to refinance the $900 million. To close out its positions on hundreds of millions of dollars of interest-rate swap deals originally entered into by former Mayor Richard M. Daley, the city will have to come up with more than $200 million. City officials say deals are in hand to close out about half of those deals, with the remainder expected to close around June 8.

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