CHICAGO - Chicago received $3.6 billion of orders on its $884 million general obligation bond issue Wednesday that marked its first outing with GOs tarnished by two triple-notch downgrades and a drop into the Baa1 category.
The city saw strong enough demand at better than expected rates that officials decided over the last week to more than double its size, wrapping two planned issues into one and avoiding the risk that rates will rise. Wells Fargo Securities ran the books.
Both Fitch Ratings and Moody's Investors Service hit the city with triple-notch downgrades last year. Moody's then slapped the city with another downgrade last week, pushing it out of the A category over its daunting pension challenges.
Market participants said the city saw strong enough demand to trim interest rates from initial scales although the city still paid a steep price for its downgrades in comparison to its last sale in 2012. The 10-year maturity in the city's tax-exempt series paid a yield of 3.95%, a spread of 145 basis point to the Municipal Market Data's benchmark on top-rated municipals. The city's tax-exempt long bond maturing in 2036 paid a yield of 5.18%, 161 basis points over MMD, according to the city. The city's 30-year taxable coupon settled at 265 basis points over Treasuries.
In the city's last deal in 2012 when it carried higher ratings, its 10 year priced at 84 basis points over MMD and a 22-year maturity priced at 89 basis points over MMD. Its 30-year taxable coupon priced 252.6 basis points over Treasuries, according to data on ThomsonReuters' Municipal Market Monitor.
"Market conditions for the city were less favorable last year given the triple Moody's downgrade in July and market reaction to a lack of progress on pension reform in Illinois," city spokeswoman Kelley Quinn said in an email Wednesday.
"The city made a strategic decision to wait until the market stabilized/normalized from any potential impacts of a triple downgrade, and until progress began to move on pension reform which we believe provides market confidence," she added.
One market participant on the deal said of the city's decision to raise the size over the course of the week: "I think the city felt the market looked good, the bid side was strong, and so the feeling was why wait when many believe interest rates are only headed up."
Quinn said the city's finance team led by chief financial officer Lois Scott believes the strategy paid off as the city received $3.6 billion in orders. The city did not comment on the final prices or provide a true interest cost.
Fitch rates the city's GOs A-minus with a negative outlook, Moody's rates them Baa1 with a negative outlook, and Standard & Poor's rates them A-plus with a negative outlook.
The city initially intended to sell about $400 million of tax-exempt and taxable new money and refunding bonds in the first of two planned GO sales. The $400 million was used in the city's preliminary offering statement but city officials had cautioned the figure could change depending on the market. A second GO issue with a separate financing team was slated for later in the spring.
The City Council last month authorized the sale of up to $900 million of GO borrowing.
Late last week, the city raised the offering's size to $655 million, including a $248 million tax-exempt series and a $407 million taxable series, according to the roadshow later attached to the offering statement.
The city was swayed by strong early pricing indications and decided earlier this week to further raise the issue to about $790 million. On Wednesday, the city bolstered the overall size to $880 million with the tax-exempt piece at $432.6 million and the taxable series at $450.8 million, according to market participants. The city also moved up the pricing of the taxable series from Thursday to Wednesday.
The bigger deal size likely means the city won't return to the market this spring as it had previously planned with a second GO sale. The city added Loop Capital Markets LLC, which was slated to run the books on the second GO sale, as a co-senior on the Wednesday sale.
William Blair & Co. Inc., BMO Capital Markets, and Cabrera Capital Markets LLC served as co-senior managers. Blair, Goldman Sachs, and Ramirez & Co. were slated as co-seniors on the second deal. Blair was already assigned a similar position on the Wednesday sale and the city added Goldman and Ramirez as co-managers.
Columbia Capital Management and Kalotay & Associates advised the city on the deal.
Proceeds will fund the city's 2013 and 2014 capital program, refund debt for savings, restructuring existing debt as part of an ongoing smoothing out of the city's debt portfolio, pay off judgments, and swap some commercial paper to long-term debt.