CHICAGO - Chicago will fold its conversion to fixed-rate of $800 million in floating-rate general obligation paper into one transaction pricing Wednesday with Bank of America Merrill Lynch running the books.
The city was put in a precarious liquidity position when Moody's Investors Service dropped its general obligation bonds to speculative grade May 12 and also downgraded Chicago's water and sewer, sales tax and motor fuel bonds.
The shift to a fixed rate on the bonds will help ease some of the risk that banks could demand repayment of $2.2 billion of debt from floating-rate deals, swaps, and credit lines due to triggers and default events caused by the downgrades.
In disclosure tied to the offering, Chicago reported that it's struck forbearance agreements with banks that support its general obligation bonds until after their planned closing dates on May 29 and June 6, and more significantly, on its short-term credit lines. The city also reported it has a new line and an expanded one now in place.
"The forbearance agreements are intended to enable the city to complete the conversion of all its outstanding general obligation variable rate to fixed-rate bonds, to terminate in an orderly fashion the letter of credit agreements and remaining interest rate swaps associated with those general obligation variable rate bonds and to continue the short term borrowing program," its offering statements say.
The forbearances ease the threat that banks could demand more than $1.6 billion.
Citi, Ramirez & Co. Inc., and Siebert Brandford Shank & Co. will be co-senior managers. Another eight firms round out the syndicate on the transaction. Columbia Capital Management Inc. is advising the city on the deals.
The city made its plan official Thursday when it posted updated offering statements tied to the reoffering of $380 million of floating-rate paper from issues in 2002 and 2003 and published offering statements on the conversion of another $422 million tied to deals in 2005 and 2007.
Finalization of the borrowing plan caps a tumultuous week following the city's downgrade to Ba1 with a negative outlook from Moody's over the challenges posed to city pension reforms by a state Supreme Court ruling voiding state reforms.
Fitch Ratings and Standard & Poor's then downgraded the city within investment grade territory, to BBB-plus and A-minus, respectively, citing liquidity risks posed by the Moody's downgrades.
Kroll Bond Rating Agency on Thursday affirmed the city's A-minus rating and stable outlook.
After the Moody's downgrade, city officials decided to delay the already scheduled May 19 reoffering of $380 million as they considered how best to enter the market.
The city's aim in folding the deals together and putting a Wall Street bank with deep pockets at the helm is to hold down the yield penalties it will pay due to its ratings and liquidity turmoil.
"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," said one market source.
Bank of America needed clearance from its credit committee to take the helm on the larger transaction, sources said. The city also needed the delay to get forbearance agreements in place, signaling to the market that it is addressing its liquidity risks.
Siebert was to have led the 2003 conversion and Ramirez was to have led on the 2002 bonds. They are now co-senior managers with Citi. The 2005 paper being remarketed totals $222 million and the 2007 paper $200 million.
The city's forbearance agreements extend through the planned conversion dates of the floating-rate GOs, the offering statements said. The Moody's downgrade triggered default events on all 11 letter of credit facilities that supported the GOs. The banks include Royal Bank of Canada, Bank of New York Mellon, Barclays, JPMorgan, Bank of Montreal, and Northern Trust.
The city also has entered into forbearance agreements through the planned conversion dates on interest-rate swaps on which the Moody's downgrade triggered termination events. That's in addition to swap terminations triggered by Moody's previous downgrade of the city in February.
The city reported that it's made a total of $139.5 million of termination payments this month based on negative valuations so far on swaps ties to the 2002, 2003, 2005, and 2007 bonds being reoffered. The city still has another five to terminate tied to the 2005 bonds with counterparties Goldman Sachs, Bank of Montreal, PNC, and two with Deutsche Bank. They are negatively valued at $60 million.
The forbearance period can be terminated earlier under a series of conditions that includes the city being hit with a further downgrade from Moody's or if other events of default are triggered under credit agreements.
On its short-term borrowing program, the city retains the capacity to borrow up to $700 million, including $100 million of commercial paper and $600 million through its credit lines. It previously had about $600 million outstanding.
"The banks participating in the short term borrowing program have entered into forbearance agreements agreeing not to exercise their respective rights and remedies as a result of such default" until Sept. 30, the offering documents say. "The city is negotiating with the participating banks for extensions of their respective agreement expiration dates or forbearance periods."
Chicago said on May 19 it received a commitment from JPMorgan Chase Bank to provide a new $200 million to cover the redemption prices of the 2005 bonds. On May 20, Morgan Stanley committed to increase its current $100 million line to $300 million that can be "used for any city purpose."
The lines provide the city capacity to have $1.1 billion outstanding, which exceeds a city ordinance limit of $1 billion. "The city will adjust its borrowings with the liquidity provides to keep within the $1 billion authorized for the short term borrowing program," the offering statements said.
The program previously included the ability to issue $100 million of CP with a expiration or termination of bank support on Sept. 30. A line for $200 million expires Nov. 30, a line for $100 million expires June 30, 2016, another $100 million line expires Sept. 30, 2016, and a $200 million line expires April 25, 2016. The banks include BMO Harris Bank, Bank of America, Morgan Stanley, Barclays, and JPMorgan.
The deferral of the May 19 deal also coincided with a shift underway in the city's fiscal leadership. Chief financial officer Lois Scott is leaving, handing the reins to Barclays public finance banker Carole Brown. Scott timed her departure to the start of Mayor Rahm Emanuel's second term. He took the oath Monday.
Market participants will watch to see where the city's interest rates land. 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.
The spread on some of its GOs in secondary trades jumped to 300 basis points over the Municipal Market Data benchmark after the downgrade. 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.