CHICAGO — The Chicago Transit Authority board this week signed off on the agency’s planned sale of $550 million of sales tax-backed, mostly taxable Build America Bonds to finance the acquisition of new rail cars.
Goldman, Sachs & Co. is the senior manager and Cabrera Capital Markets LLC is the co-senior manager on the sale set for later this month. Another nine firms round out the underwriting team. Gardner Underwood & Bacon LLC, Robert W. Baird & Co., and Scott Balice Strategies are financial advisers on the transaction. Katten Muchin Rosenman LLP is bond counsel and Hardwick & Associates LLC is co-bond counsel.
The CTA tentatively expects to enter the market on Feb. 24 or 25, said chief financial officer Karen Walker. The structure tentatively calls for about $75 million of tax-exempt bonds and $475 million of BABs. Walker said the bonds likely will include a make-whole call provision. The agency will apply for the federal government’s 35% direct-pay interest subsidy.
Ahead of the sale, Moody’s Investors Service assigned an A1 to the bonds, the same rating that applies to the CTA’s nearly $2 billion of pension-related bonds issued in 2008 that carried both the sales tax backing and a pledge of revenue from the CTA’s share of Chicago’s tax on real estate transactions. Standard & Poor’s has not yet rated the bonds. It rates the 2008 issue AA-plus. Fitch Ratings was not asked to review the deal.
The agency will include a mix of serial maturities and term bonds. The serials don’t begin until 2021, allowing for the bulk of the transaction to sell in the form of BABs, which remain most beneficial on mid- to long-dated maturities.
The maturity schedule is built around the CTA’s expectation of the size and availability of its federal grants. The bonds are secured solely by the CTA’s share of sales taxes, but the agency intends to repay the debt with federal funds. “We will have sufficient federal dollars to pay off these bonds,” Walker said.
Proceeds will help pay the $674 million needed to purchase 406 new cars to replace the oldest in the CTA’s fleet of 1,190, some of which are 40 years old, said CTA spokeswoman Sheila Gregory.
The cars are currently being tested on CTA tracks before the order is finalized. It will take several years for the cars to be built. The CTA may also use proceeds to finance some refurbishment of existing cars and track work.
“This transaction will allow us to address some of our capital needs and reduce our maintenance costs,” Walker said. Walker said the cash-strapped CTA had long planned to borrow to speed up its purchase of the rail cars, but might have waited if not for the interest savings offered by the BAB program.
Any savings are welcomed as the agency faced a $300 million gap going into 2010 due to dwindling sales tax collections and growing labor and debt-service costs. The agency balanced its books through layoffs, budget cuts, and service reductions, as well as by dipping into capital funds that were freed by borrowing approved by the state.
The state gave the CTA’s parent, the Illinois Regional Transportation Authority, permission to issue $179 million of general obligation bonds in order to free up capital funds for use to close the CTA’s operating budget shortfall in exchange for the CTA’s pledge to freeze fares for two years.
Moody’s assigned an A1 to the deal and affirmed the A1 on the 2008 bonds and the A2 assigned to the CTA’s 2006 issue sold through the Public Building Commission of Chicago to finance the acquisition of a new headquarters and its federal capital grant-backed bonds. The CTA will have a total of $3.4 billion of debt after the new sale.
The strength of the credit includes the CTA’s importance to the region, the sales tax increase it won from the state in 2008, and the diversity and size of the sales tax base that had strong coverage levels even amid dwindling collections. Sales tax revenues will provide 1.54 times coverage of maximum annual debt service based on projected collections.
The CTA collected $342 million in sales taxes in 2008, up from $302 million a year earlier, but expected more due to the rate increase approved by the General Assembly in 2008. That increase, and an increase in the city’s real estate transfer tax, were part of a pension reform package that included the $2 billion bond authorization. The CTA received $330.4 million in sales taxes last year and projects a 1.5% increase this year, followed by 2.9% in 2011 and 2012.
The pension bond issue established a trust to fund the CTA’s unfunded liability for other post-employment benefits and raised the funded ratio of its pension fund to 75.8% from 37.2%. The CTA faces an increase of $20 million in its pension payment this year as the pension fund’s valuation has fallen due to market losses. The payment schedule also relied on an aggressive rate of return of 8.75%, though that has been lowered to 8.5%.
Walker said the CTA opted not to include the real estate transaction tax as a security on the new bonds because of the volatility of those tax collections. The CTA received about $30.1 million from the tax in 2008 and $25 million last year.
The credit’s weaknesses include the priority on sales taxes claimed by debt service on the RTA’s bonds, the CTA’s narrow liquidity levels, and the recession’s impact on sales tax collections.
The CTA has one additional financing planned this year, a $100 million sale secured by federal capital grants. The CTA has $6.8 billion of unfunded capital needs. It expects to receive about $1 billion over the next few years under the $31 billion Illinois capital budget approved last year.
The CTA operates the second-largest transit system in the country. Total ridership last year was 521.3 million, down about 1% from a year earlier due to the recession and a fare increase.
