CHICAGO — Chicago closed the books on its nearly $3 billion sales tax securitization bond program with a $600 million taxable issue Wednesday that fared well given the risks some investors see in the changing of the guard in city and state leadership, several market participants said.
The Sales Tax Securitization Corporation sold $605 million in two tranches, up from a planned $551 million, with Citi and Ramirez as joint bookrunners.
The coupon on the nearly $303 million 2040 maturity landed at a spread of 155 basis points to Treasuries and the $303 million 2048 maturity offered a coupon that landed at a 170 basis point spread, according to the initial pricing wire.
The deal marked the fourth and final issue under the program that refunded city sales tax revenue bonds and general obligation bonds to achieve a mix of upfront budget relief and longer-term present value savings.
“The creation of the STSC and issuance of AAA rated debt has resulted in more than $700 million in budgetary savings for the city over a five-year period,” the city finance department said in a statement. The deal achieved net present value savings of 3.8%.
The program carries a AA-minus rating from S&P Global Ratings and AAA marks from Fitch Ratings and Kroll Bond Rating Agency.
The issue attracted 35 investors, including 11 who were new to the STSC, and was 1.1 times oversubscribed. About $140 million of orders came from three international investors in Europe and Asia, including an investor from Taiwan, representing the first sale of municipal revenue bonds to a Taiwanese life insurer since new regulations took effect permitting their investment in revenue bonds, according to the city's statement.
The corporation has sold four tranches of debt totaling $2.64 billion. Chief financial officer Carole Brown had said the goal was to wrap up the program before Mayor Rahm Emanuel leaves office in May. He announced in September he would not seek a third term in the February race.
Spreads were described by multiple market participants as “reasonable” given the current market and political changes underway at both city and state levels.
The corporation’s early 2018 tax-exempt and taxable deal offered a 2048 taxable maturity that finished at a 161 bp spread. The corporation’s first deal in late 2017 offered taxable and tax-exempts with a taxable 2043 term bond settling at 146 bp spread. The third sale late last year solely offered tax-exempts.
Some spreads have widened since the original deal which reflects overall changes in market dynamics, supply and demand at the time of pricing, and fluctuating interest on the yield curve, several buyside participants said.
But other factors, specific to Chicago and the securitization credit, were at play in Wednesday’s pricing and some observers suggested the city dodged a bullet on yield penalties given uncertainties over the fiscal direction of the state under newly inaugurated Gov. J.B. Pritzker and Emanuel's pending exit.
The mayor and his CFO both enjoy the market’s favor after they led the city to raise revenue for pensions, cut the city’s structural deficit and improved investor relations. More than a dozen candidates are vying for the mayor's office. The city's and state’s fiscal fortunes are linked and Pritzker is a political novice without a track record.
“This is really good execution given that we have a new governor and we are not sure who the next mayor will be, so all political management is going to be new, and the city managed to get a $600 million sales tax securitization deal done at a reasonable market level,” said Brian Battle, director of trading at Chicago-based Performance Trust Capital Partners.
The risks associated with the securitization bonds range from the sturdiness of the revenue asset sale to a bankruptcy-remote special entity, whether the state will honor the lockbox on the transfer of the sales taxes, and whether sales taxes will perform as anticipated.
Strong legal protections that guard against state interference are built into the structure as well as sturdy debt service coverage ratios, but the market still imposes a cost for Chicago’s name.
“Economic and political risks are all part of the penalty,” Battle said.
Battle said the fact the deal wasn’t hit with steeper penalties suggests buyers took comfort in the legal provisions of the structure.
A local trader and a buyside analyst whose firm did not participate in the deal agreed on the pricing.
“It looks reasonable considering the risks that are tied to the change in administration” at the state level, said the analyst.
Other factors that may have influenced the pricing include S&P’s recent methodology change on priority lien debt that resulted in a one notch downgrade of the securitization bonds and a five-notch downgrade of the state’s sales tax revenue bonds. The actions came ahead of the scheduled sale of the third tranche late last year. The city delayed the sale and returned with a scaled down version and shorter maturities.
“The market looks at what S&P did with the rating recalibration and asks whether it will stay at that level,” said the buyside analyst.
The program also appeals to buyers interested in Chicago paper with a high-grade rating, the analyst said.
Market participants were uncertain whether this week's pricing was affected by the potential $7.7 billion pension obligation bond that would use the same securitization structure that taps residual sales taxes not used by the STSC and other revenues that flow through the state.
“It’s still just an idea,” said Battle. Emanuel has introduced the ordinance laying the legal groundwork for the deal’s structure but approval of the deal and a sale likely would fall to the new administration and City Council to execute.
The city sought state legislation allowing for home rule units to securitize revenues that flow through the state in 2017 as a means to achieve refunding savings by bypassing the city’s weaker GO ratings that range from junk to the single-A category.
The four tranches include a $744 million issue, a $680 million sale, a $612 million issue, and Wednesday’s $605 million issue. The structuring and sales didn't always go smoothly with several deals delayed and tinkered with but they accomplished the city's goals.
