Northwest Indiana Discussion

AN EXPLANATION OF "JUNK" BOND RATINGS

Bonds are generally classified into two groups - "investment grade" bonds and "junk" bonds. Investment grade bonds include those assigned to the top four quality categories by either Standard & Poor's (AAA, AA, A, BBB) or Moody's (Aaa, Aa, A, Baa).

The term "junk" is reserved for all bonds with Standard & Poor's ratings below BBB and/or Moody's ratings below Baa. Investment grade bonds are generally legal for purchase by banks; junk bonds are not.

The specific definitions assigned to junk bond ratings by the services help define the magnitude of the risk associated with them. Because Standard & Poor's definitions are somewhat more comprehensive, they are quoted here:

BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC, and C is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.

BB: Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments.

B: Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal.

Because a B rating is the single most common rating found in a junk bond portfolio, Moody's definition of its B rating follows:

Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.

To resume with Standard & Poor's:

CCC: Debt rated CCC has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal.

D: Debt rated D is in payment default.

Fading casino revenue has Indiana city selling debt
October 21, 2014
Bloomberg News
KEYWORDS casino / debt / hammond / water


After decades of declining population and shifting economic fortunes, the city of Hammond in northwest Indiana is betting that water from Lake Michigan will refresh its finances.

Hammond, about 30 miles southeast of Chicago on the lake’s southern shore, faces falling property-tax collections and fading revenue from a casino that opened in 1996. Caesars Entertainment Corp.’s Horseshoe Hammond casino, with almost 3,000 slot machines, became Hammond’s largest private employer as the region’s steel mills shut down and the population dwindled 29 percent from 1960, to about 79,000.

The city is banking on its ability to sell water to other towns at cheaper rates than Chicago offers. Officials plan to fill this year’s budget deficit by selling about $30 million of debt backed by water payments from nearby Chicago Heights, Illinois. While credit-rating service Standard & Poor’s cited the one-time fiscal fix when it cut the municipality to three steps above junk last month, Hammond sees water as the way to balance its books.

“This is a windfall for us,” said third-term Mayor Tom McDermott, who’s running for re-election next year. “Water is getting more expensive. Hammond is positioned very well in that case. Times may be tough right now, but the future is very bright.”

Lost luster

Water may cushion the blow as the city’s reliance on casinos means it’s again dealing with an industry that’s losing its luster.

Incorporated in 1884 and named after George Hammond, who started a slaughterhouse, Hammond developed into a rail and manufacturing hub, prospering as steel mills came to the area in the late 19th century, said Richard Lytle, a historian at the city library. As the steel business shrank, local manufacturing jobs plunged 90 percent from 1970 to 2010, said Micah Pollak, assistant economics professor at Indiana University Northwest in Gary.

Now the city projects that revenue from taxes and profit-sharing connected to Horseshoe Hammond will tally about $34.5 million this year, down from a 2009 peak of about $41.2 million, according to city Controller Heather Garay.

Mismatch challenge

Officials are also contending with a state-implemented property-tax cap that reduced city revenue by $9 million last year. The combination left the city with a $3.8 million hole in its 2014 budget as of Oct. 20, Garay said. S&P, in a Sept. 18 report, cut Hammond to BBB+.

“There’s a mismatch between revenues and expenditures,” said Steffanie Dyer, an S&P analyst in Chicago.

Horseshoe had 2,094 employees as of March, according to the city’s website. A hospital was the second-biggest employer.

About a fifth of residents live in poverty, and the median household income of $38,677 is 20 percent below the state average, Census data show.

The city’s take from gaming has ebbed as people gamble less while competition intensifies in the industry, said McDermott, the mayor.

Clennisteen Bush, a 62-year-old hospital clerk from Chicago, shows why. Five years ago, she’d come to the Hammond venue a couple times a month. These days, her visits are about half as frequent.

‘No payout’

“These machines, they take your money,” Bush said one evening this month, seated at a slot machine and occasionally pressing a button that sent the five columns of letters and pictures of wolves, eagles and other beasts whizzing on her screen. “I know it’s no payout for me.”

Gary Thompson, spokesman at Las Vegas-based Caesars, declined to comment on the Hammond business.

“The cash cow, the casino is drying up,” Councilman Homero Hinojosa, who’s running against McDermott, said.

Monetizing water revenue through the city’s first sale of water bonds is going to clean up Hammond’s finances, McDermott said. Taxpayers don’t need to worry about the debt because it’s backed by water payments, he said.

Hammond is taking advantage of water rates that are lower than Chicago’s, McDermott said, after that city raised water and sewer rates for its residents starting in 2012.

Water rights

Hammond’s customers include five localities in Indiana and seven in Illinois, including Chicago Heights, according to the water department’s website.

Its waterworks is one of three public facilities, along with East Chicago and the Indiana-American Water Co., that are allowed to draw water directly from Lake Michigan, said Mark Basch, head of water rights and use at Indiana’s Department of Natural Resources.

Selling water won’t solve Hammond’s woes, said Michael Hicks, an economist at Ball State University in Muncie.

“Water is not a long-term solution,” he said. “[Hammond] has so many other problems -- performance of schools, quality of neighborhoods and other things, which after five decades of neglect do not tell a very attractive story.”

The proposed bonds would be backed by money from a 20-year contract with Chicago Heights, which buys on average about 2.7 billion gallons of water a year from Hammond, said Edward Krusa, chief executive operator of the Hammond Water Works Department.

The city is working on a private placement and looking to close the deal Dec. 16, Garay said.

Chicago Heights’s accord with Hammond Water Works almost quadrupled its rate to $2.20 per thousand gallons, and went into effect in January 2013, Krusa said. The previous contract was for 30 years.

Net revenue from the deal is about $5.6 million a year, with about $1.2 million going to the water department and about $4.4 million to the city, Krusa said.

“Water is our most valuable asset,” said Dave Ryan, executive director of Lakeshore Chamber of Commerce in Hammond. “It’s nice to have gaming dollars, but they’re not something that can be counted forever.”

http://www.nwitimes.com/news/local/lake/despite-red-ink-criticism-hammond-defends-bond-sale/article_31c60fe8-f10b-5b56-9460-91fa1e75812a.html


Despite red ink criticism, Hammond defends bond sale

14 hours ago • Ed Bierschenk edwin.bierschenk@nwi.com, (219) 933-4195

HAMMOND | Despite some scathing criticism from a current and former city officials, Hammond administrators said they still hope to sell $36.2 million worth of bonds backed up by water revenue they anticipate receiving from their contract with Chicago Heights and end this budget year with a surplus.

Councilman Homero "Chico" Hinojosa, who voted against authorizing the bond issuance last year, took out an advertisement Tuesday stating the city's bonds did not sell "due to the city's poor, financial condition." Hinojosa, who is running against current Mayor Thomas McDermott Jr., was joined in the criticism of the proposed sale by former City Attorney William J. O'Connor.

Mark McLaughlin, McDermott's chief of staff, and City Controller Heather Garay said the bonds have not been sold yet because the city is doing a private placement rather than public offering of the bonds. McLaughlin and Garay now say they expect the sale to be completed within two weeks.

The bonds were initially rated as BB+ by Standard & Poor's Credit Rating Agency, a non-investment grade commonly known as junk bonds. In his advertisement, Hinojosa said they are called junk bonds "because the city's bond rating, the true measure of our financial standing, has hit rock bottom."

Standard & Poor's later withdrew its rating on the bonds at the city's request. Private placements do not usually need credit ratings.

According to Standard and Poor's, there are actually several grades below BB+, which is one ranking below investment grade. The lower the rating, the more interest the city is likely to have to pay on the bonds. The city's other long-term debt is rated BBB+.

McLaughlin anticipated the city will have to pay something above 4 percent on the bond issue, but believes the city will improve its bond rating over the next few years and then be able to reissue them at a better interest rate.

A Standard and Poor's report by analyst Kathryn A. Clayton on the bond issuance said the city has very weak budgetary performance, with a deficit of 17.8 percent for the general fund and 10.5 percent for the total government funds in 2013.

"Management has relied on gaming fund revenue and plans to issue bonds to fill the budget gaps, although it is our opinion that additional and significant budgetary adjustments will be needed to correct the structural imbalance. ... We are unsure when the imbalance will be cured," said the report.

On the other hand, the report noted the city is reviewing all aspects of its operations to find ways to balance the budget" and has "strong liquidity."

The city plans to pay off the proposed bond issuance with money it obtains through its contract with Chicago Heights to sell that city water. Casino revenue will be used to back that up and, if that falls short, the city could go to property tax revenue, although McLaughlin indicated that water revenue will be more than sufficient to pay off the bonds.

Hammond's contract to sell water to Chicago Heights does not mandate the city has to buy water from Hammond, which O'Connor noted Monday, but McLaughlin and McDermott have indicated they do not see Chicago Heights getting water cheaper elsewhere.

Still, Hinojosa opposed the city talking on more debt and said he sees bankruptcy for the city in the next year or two. He suggests university professors be invited in to study the city's finances.

Garay, though, said the influx of the $30 million will allow the city to pay off other debt and to allow it to have a surplus at the end of the year. She said the city is taking steps to help pare down expenses long term, such as combining departments.