Chicago wastewater revenue bonds rating affirmed at AA- with stable outlook

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Chicago wastewater bonds rating

Highlights

KBRA affirmed the City of Chicago's Second Lien Wastewater Transmission Revenue Bonds at AA- with a stable outlook, citing stable operating performance and supportive demographics.
As of FY-end 2025, Chicago had $1.47 billion in second lien bonds outstanding, subordinate to $16.3 million senior lien bonds and senior to $462 million of IEPA loans.
High leverage at 63% of net fixed assets and a $3.07 billion capital improvement plan through 2030 pose continued pressure and potential borrowing needs, constraining rating upside.

Credit profile and bond structure

Kroll Bond Rating Agency said the affirmation covers the City of Chicago, Illinois Second Lien Wastewater Transmission Revenue Bonds, with the rating supported by the wastewater system’s historically stable operating performance, limited operational complexity, and favorable demographics across its large and diverse service area.

The second lien bonds are limited obligations of the city and are payable solely from a second lien on net revenues of the Sewer Revenue Fund. As of fiscal year-end 2025, the city had $1.47 billion of second lien bonds outstanding, subordinate to $16.3 million of senior lien wastewater transmission revenue bonds maturing in 2028, and senior to $462 million of Illinois Environmental Protection Agency loans.

While the senior lien remains open, the city covenants that it will not issue additional senior lien bonds. KBRA said the customer base provides ample resources to support a system focused on collecting and conveying sanitary and storm sewage, while consistent rate increases and operating efficiencies have supported debt service coverage and liquidity over the past five years.

Leverage risks and future borrowing needs

KBRA identified several constraints on the credit profile, including the absence of a debt service reserve fund requirement in the master trust indenture and a relatively weak 1.10x rate covenant. The agency also highlighted high leverage, with long-term debt equal to 63% of net fixed assets at fiscal year-end 2025.

That leverage is expected to remain under pressure because of the city’s substantial $3.07 billion multi-year capital improvement plan, which may require significant additional borrowing through 2030. KBRA said an upgrade would likely require a material and sustained reduction in leverage, while the current structural and borrowing pressures remain factors for potential downside risk.

In our earlier coverage of sovereign borrowing risks in a higher-rate environment, we noted that prolonged geopolitical tensions and elevated public spending are testing governments’ fiscal resilience as refinancing costs rise. The analysis highlighted that emerging and frontier markets are especially exposed because interest-service burdens tend to be high relative to narrower revenue bases, while persistent inflation shocks can further weaken credit headroom.

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