KBRA assigns a long-term rating of AA- to the Sales Tax Securitization Corporation (“STSC” or the “Corporation”) Third Lien Sales Tax Securitization Bonds, Refunding Series 2026A. Concurrently, KBRA assigns a long-term rating of AAA to STSC’s Senior Lien Sales Tax Securitization Bonds, Taxable Refunding Series 2026, affirms the AAA rating on outstanding Senior Lien Sales Tax Securitization Bonds, and affirms the AA+ rating on outstanding Second Lien Sales Tax Securitization Bonds. The Outlook on all obligations is Stable.

The long-term ratings reflect the strong bondholder protections provided by the STSC Authorizing Act, the broad array of Sales Tax Revenues pledged under the applicable Senior Lien, Second Lien or Third Lien Indenture and subject to the statutory lien provided by the Act, the diverse economic base in which the pledged sales taxes are levied, and the strong coverage, to date, of aggregate maximum annual debt service on outstanding Sales Tax Securitization Bonds from pledged Sales Tax Revenues. State law, the bankruptcy remoteness of the Corporation, and provisions of the Sale Agreement and the Indenture provide a legal framework that KBRA believes insulates the pledged Sales Tax Revenues and the Corporation from the operating and credit conditions of the City of Chicago (the “City”).

Counterbalancing credit factors include the City’s high overall sales tax rate, which has the potential to adversely impact retail spending and thus growth in pledged Sales Tax Revenues, likely limiting the City’s ability to further raise sales tax rates; and the monthly and annual volatility of pledged Sales Tax Revenues, which vary as a function of retail spending in the City. Pledged Sales Tax Revenues are thus influenced by macroeconomic conditions, as well as by factors including per capita income, poverty, unemployment, and tourism in and around Chicago.

The ratings on the Second Lien and Third Lien Sales Tax Securitization Bonds also reflect their respective subordinate payment priorities. Due to this subordination of payment, KBRA makes a rating distinction for Sales Tax Securitization Bonds issued under these Liens and the Senior Lien.

Key Credit Considerations

Credit Positives

  • State law, the bankruptcy remoteness of the Corporation, the Sale Agreement, and the Indenture provide a strong legal framework.

  • The broad base of goods and services included in the Pledged Sales Tax revenue base, together with tested collection and distribution mechanics, enhance underlying asset characteristics.

  • The resiliency of pledged Sales Tax Revenues is demonstrated by their rapid post-pandemic recovery and subsequent strong, month-over-month growth.

  • Some protection against mid-year revenue declines is afforded by the accelerated set-aside provisions of the Master Indenture and Supplemental Indentures.

Credit Challenges

  • The absence of a fully funded DSRF constitutes a greater credit concern for the Third Lien Bonds than for the prior liens, given their subordinate payment priority.

  • Additional Senior Lien and/or Second Lien issuance would reduce revenues available for payment of Third Lien debt service.

  • The City’s high overall sales tax rate may adversely affect growth of pledged Sales Tax Revenues.

  • Pledged Sales Tax Revenues demonstrate monthly and annual variability.

The Stable Outlook reflects our expectation, based on historical revenue performance, that Pledged Sales Tax Revenues will continue to provide coverage of Senior Lien, Second Lien and Third Lien Bonds MADS comfortably above the minimum thresholds required under the Additional Bonds Tests. The Outlook further reflects KBRA’s expectation that Third Lien debt service coverage would remain adequate under sever stress scenarios associated with a significant economic downturn.

Rating Sensitivities

For Upgrade

  • Consistent improvement in coverage of aggregate MADS from pledged Sales Tax Revenues.

For Downgrade

  • A decline in pledged Sales Tax Revenues that results in a material weakening in coverage of aggregate MADS.

  • A decline in pledged Sales Tax Revenues that results in the recurrent monthly inability to meet the monthly set-aside provisions of the Senior, Second, or Third Lien Bonds.

  • The issuance of additional Senior Lien or Second Lien Bonds which materially weakens aggregate MADS coverage or reduces the residual revenues available to meet the monthly set-aside requirements of the Third Lien Bonds.

  • The issuance of additional Third Lien Bonds that materially weakens Third Lien debt service coverage and the ability to meet monthly set-aside requirements.

To access ratings and relevant documents, click here.

Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA), one of the major credit rating agencies (CRA), is a full-service CRA registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a Designated Rating Organization (DRO) by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized as a Qualified Rating Agency by Taiwan’s Financial Supervisory Commission and is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider (CRP) in the U.S.

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