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Fitch takes on Moody's over assessment of Chicago Public Schools

By Karen Pierog

CHICAGO, Feb 1 (Reuters) - Fitch Ratings took aim at its credit ratings competitor Moody's Investors Service in an unusual and blunt public notice on Wednesday with a report detailing disagreements over its analysis of the Chicago Public Schools bond payment protections.

Fitch attacked conclusions Moody's reached in a Jan. 12 report on the nation's third-largest public school system, which is struggling with escalating pension payments, drained reserves and debt dependency.

Amy Laskey, a Fitch managing director, said Wednesday's report was not requested by Chicago Public Schools (CPS) or anyone else.

"We felt like it was something that should be clarified and would be helpful to investors," she said.

Fitch disagreed with Moody's conclusion that state aid dollars pledged to pay off the district's alternate revenue general obligation bonds could be diverted to operations and said such a move is prohibited by Illinois law.

Additionally Fitch took issue with an assessment by Moody's of a security feature for the district's new capital improvement tax bonds. Revenue from a specific property tax levied for capital improvements is sent directly to the bond trustee for debt service payments for the nearly $730 million of bonds CPS sold in December.

Moody's had said that feature and a statutory lien give "a rating uplift" to the bonds.

However, Fitch said the revenue intercept would lose its effectiveness in the case of bankruptcy. Fitch, which rated the bonds A, eight notches above its B-plus junk rating for the district's GO bonds, also said there would be no statutory lien protection for the bonds in bankruptcy.

David Jacobson, a Moody's spokesman, would only refer Reuters to the agency's Jan. 12 CPS report. There was no immediate comment from a CPS spokeswoman on the rating agencies' disagreement.

Former public finance rating analysts who are still involved with municipal bonds characterized Fitch's move as unusual.

"I've not seen one rating agency question another's criteria," said Michael Belsky, executive director of the Center for Municipal Finance at the University of Chicago and a former Fitch group managing director.

Dick Larkin, director of municipal credit analysis at Stoever Glass & Co, Inc, who worked at both Fitch and S&P, said he has never seen a credit rating agency put out a press release saying another credit agency is wrong.

"Rating agencies do not attack each other. They just say 'here's our opinion,'" he said.

Moody's, which rates CPS deep in the junk level at B3 with a negative outlook, has not been asked by the district to rate its bond issues since 2013. In December, Chicago Mayor Rahm Emanuel, who controls CPS, asked Moody's to withdraw the junk rating it maintains for the city.

CPS cannot file for municipal bankruptcy in Illinois, although there have been attempts to change state law to allow such a move.

(Reporting By Karen Pierog; Editing by Daniel Bases and Meredith Mazzilli)