Regional News

Chicago to Tap Stimulus Programs

CHICAGO — After escaping punishment from rating agencies for dipping into reserves to erase its budget deficit, Chicago will enter the market this week with $770 million of new-money and refunding general obligation bonds in a transaction that marks the city’s first use of federal stimulus bonding programs.

The city will take retail orders on Tuesday and open up the deal to institutional buyers on Wednesday. The deal is split into four series of up to $420 million of tax-exempt new-money and refunding bonds, up to $110 million of taxable new-money and refunding bonds, $110 million of taxable new-money Build America Bonds, and up to $133 million of taxable recovery zone economic development bonds.

Chicago intends to raise about $300 million of new-money proceeds from the transaction with the size of the refunding tranches — some of which will restructure existing debt to provide immediate budgetary relief — depending on interest rates this week. The ordinance approved by the City Council last year allows issuing up to $875 million of new-money and refunding GOs.

The all-minority underwriting team is led by senior manager Siebert Brandford Shank & Co.  The other underwriters are Cabrera Capital Markets LLC, Estrada Hinojosa & Co., Grigsby & Associates Inc., and Loop Capital Markets LLC. Perkins Coie LLP and Burke Burns & Pinelli Ltd. are co-bond counsel. Duane Morris LLP and Gonzalez Saggio and Harlan LLC are co-underwriters counsel.

The deals mark Chicago’s first use of the federal stimulus’ BAB program. They will tap the city’s allocation of recovery zone economic development borrowing also included in the package.

The City Council’s bonding ordinance designated Chicago a federal recovery zone, paving the way for use of the allocation. The city will apply for the federal government’s 35% BAB interest subsidy and the 45% recovery zone economic development bond interest subsidy.

Officials tentatively plan to set aside at least 10% of the transaction in several maturities for retail orders, according to market participants. Final structural details, including whether the BABs would include a traditional municipal call or a make-whole call provision, were still being discussed on Friday.

Ahead of the sale, the city’s GO rating on $6.5 billion of debt was affirmed. Fitch Ratings rates the city AA with a negative outlook, Moody’s Investors Service rates it Aa3 with a stable outlook, and Standard & Poor’s rates it AA-minus with a stable outlook.

Chicago’s reliance on reserves from its parking meter lease to erase a good chunk of its $520 million 2010 deficit raised concerns among some, including those City Council members who voted against Mayor Richard Daley’s $6.14 billion budget, who were worried that it could lead to a downgrade. The city’s resolve to leave its $500 million budget reserve, established with proceeds of the $1.8 billion Chicago Skyway toll bridge lease in 2005, helped fend off any negative action.

The budget wiped out the deficit with savings from debt restructuring and the use of $250 million from a $400 million long-term reserve account and $100 million from a mid-term reserve created with funds from the $1.14 billion, 75-year lease of the parking meter system last year.

The mayor chose dipping into reserves over additional cutting or raising taxes and fees and stressed at the time that a total of $730 million in reserves would remain intact.

The budget also relied on $118 million in near-term debt-service savings by restructuring some existing debt in the upcoming transaction to push out final maturities.

Fitch shifted the city’s outlook to negative last fall due to the large and growing structural budget deficit, reliance on one-time fixes like the debt restructuring and reserves to balance the budget, and the generally weakened state of the city’s economy.

“Further acceleration of, and reliance on, the use of long-term financial reserves to balance operations and a failure to make progress on eliminating the very large gap between current revenues and spending for operations” could drive a downgrade, Fitch analyst Melanie Shaker said.

Moody’s analyst Ted Damutz said Chicago’s credit remains challenged by its ability to cover current-year expenses with recurrent revenues, its draw on reserves, a poor general fund ending balance that was just $226,000 at the close of 2008, and a slow debt amortization schedule.

Pension funding levels also remain a challenge. The city laborers fund is at an 89% funded ratio, the police account at 48%, the fire fund at 40%, and the municipal employees fund at 64%.

The city’s credit strengths include its large and diverse tax base that has recently grown at an average rate of 9.7%, as well as management measures that included cost-cutting and the elimination of positions.



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