CHICAGO — Chicago delayed its municipal bond market appearance this week, and is tinkering with its borrowing plans, to gain more control over pricing scales following a tumultuous week that saw one of its ratings fall to junk, sources said.
The city is eyeing the use of Wall Street firms in the lead spots because they have greater capital capacity to take down bonds if the bonds can't clear the market at yields acceptable to the city, although final decisions have not been made, sources said.
"The plan is still evolving," cautioned one market source who said the decision to hold deals slated for sale this week was made over the weekend. "The city wants to come into the market in a better position to set a bottom line on prices and not just get stuck with the lowest price that clears the market. To do that, you need the book-runners to be willing to take down the bonds. It's a smart move."
The city had planned to reoffer two variable-rate general obligation bond series in fixed-rate mode this week, followed by the conversion of two more series in the coming weeks.
Chicago officials confirmed this week's delay and said its finance team is rethinking strategy, which could mean converting all four series at once or in two separate tranches, and adjusting selling groups, officials said.
The city wants to conduct the floating-to-fixed conversions to reduce risks tied to bank credit support now that banks are in position to demand up to $2.2 billion from the city due to termination and default events triggered by Moody's Investors Service's May 12 downgrade of the city to junk.
Market participants will be watching to see where the city's interest rates land when the deal is done. Spreads on Chicago paper shot up dramatically in secondary market trading following the Moody's downgrade. The city faces a narrowing of its investor base with a junk bond rating but will find an audience among those looking for yield, market participants said.
While the city could improve its edge in the market with a revised plan, it also faces the risk of new, negative developments occurring in the interim.
Chicago originally intended to remarket $182 million of 2003 GO paper and $201 million of 2002 bonds this week in floating- to fixed-rate conversions. Siebert Brandford Shank & Co. LLC is senior manager on the 2003 bonds and Ramirez & Co. Inc. is senior manager on the 2002 bonds.
Word began circulating among market participants Monday that the deals would be postponed and upsized.
Several sources said the delay was also driven by the need to secure a forbearance agreement with banks that provide credit support on the floating-rate GOs before publishing updated disclosure and offering statements. The Moody's downgrade to speculative grade triggered default events that allow the banks to demand repayment of the floating-rate GOs being converted.
City officials said it remains on track to remarket all $800 million of its floating-rate GOs as fixed-rate by mid-June.
Moody's dropped $8.9 billion of GOs, sales tax and motor fuel bonds to the speculative grade level of Ba1 and assigned a negative outlook, citing the city's pension underfunding woes, exacerbated by a state Supreme Court ruling against state-level pension reforms. Fitch Ratings and Standard & Poor's then both downgraded Chicago, though both maintain investment grade ratings, citing liquidity risks triggered by the Moody's downgrade.
The spread on some of its GOs jumped to 300 basis points over the Municipal Market Data benchmark. It had previously seen penalties of about 200 basis points. The city last year saw spreads of between 145 and 161 basis points to MMD in the primary compared a year earlier when it paid 84 and 89 basis points over MMD on comparable maturities.
