CHICAGO - Chicago's finance department plans to enter the market with new money, refunding, and restructuring issues in coming months to raise funds for infrastructure and wastewater projects and to jettison insurance on several tranches of floating-rate debt hit with higher interest rates.

The ordinances authorizing the issues were introduced to the City Council at a meeting yesterday and face a review in the coming weeks by the council's Finance Committee before they come up for a full vote.

One permits the issuance of up to $900 million of new money and refunding general obligation bonds, although the city expects to tap only a small piece of that authority in a transaction set for the current quarter. A second authorizes the sale of up to $700 million of wastewater revenue bonds although, again, the city will tap just a small piece in a deal set for the third quarter.

The higher levels were sought should the city need additional new money, should further refunding opportunities for savings arise or there's a need to restructure other tranches of floating-rate debt. A third ordinance enables the city to restructure about $300 million of insured floating-rate general airport revenue bonds for O'Hare International Airport. The restructuring would likely take place during the current quarter.

The city is moving to restructure some variable-rate debt that's faced higher interest rates due to the ongoing credit crunch that prompted the collapse of the auction-rate market in February as investors sought out more liquid investments. The turmoil has spread to floating rate bonds that carry coverage from insurers that have been downgraded due to their exposure to subprime securities.

Unlike some issuers, however, the maximum rates built into the original bond deals on the city's floating rate deals backed by downgraded insurers are limited. The city's floating rate exposure includes $2.7 billion of variable-rate demand bonds and $150 million of auction-rate securities in an overall general obligation and revenue-backed bond portfolio of about $15 billion.

"Fortunately the city has a diverse debt portfolio with more than 80% in a fixed-rate structure. We are very comfortable where we are at but that doesn't mean we are not watching the market very closely," said chief financial officer Paul Volpe.

Volpe and his aides did not have a dollar amount of the added interest costs.

The city's general obligation issue would include about $100 million of new money and an additional $90 million of refunding bonds for present value savings depending on market conditions. The city would refund another $215 million of variable-rate demand bonds that are insured by Financial Guaranty Insurance Co. that have been downgraded to Baa3 by Moody's Investors Service, BB by Standard & Poor's and BBB by Fitch Ratings.

The city will use a fixed-rate structure on the deal. The interest rate on the variable-rate bonds that are remarketed weekly have ranged in recent weeks between 4.5% and 7.5% The liquidity provider - Depfa Bank - currently holds the bonds and the city is paying a rate in the 4% range. The maximum rates, based on an indexed formula, have inched up slightly, hastening the city's plan to restructure the bonds. Depfa-First Albany Securities LLC is the senior manager on the deal with Leticia Davis serving as financial adviser and Kutak Rock LLP as bond counsel.

The city intends to raise about $150 million in new money from the sewer revenue bond sale with the remainder available in the event of refunding opportunities, although given current market conditions only about $30 million would be refunded. The sewer deal also would be sold using a fixed-rate structure with Cabrera Capital Markets Inc. serving for the first time on a city deal as the book-running senior manager, Volpe said. A.C. Advisory Inc. is financial adviser and Schiff Hardin LLP is bond counsel.

Under the O'Hare ordinance, the city intends to restructure about $300 million of GARBs that carry insurance from CIFG Assurance NA, which is now rated in the single-A category. The city will drop the insurance on the bonds that are remarketed weekly and will include a letter of credit from Dexia Credit Local which provides a liquidity facility on the current issue. Dexia currently holds the bonds and the city is paying a maximum rate in the low 5% range though in previous remarketing cycles it has paid a rate as high as 7%.

The city has $150 million of auction-rate securities under its Midway Airport revenue bond program. The city is currently paying a maximum rate of about 4.1% based on 150% of the London Interbank Offered Rate. The city intends to leave the auction-rate structure in place as officials hope this year to enter into a long-term concession lease of Midway with a private operator for an upfront payment. The city has qualified six teams to participate in a bidding process later this year. The city would retire Midway's $1.25 billion of debt with proceeds from the deal.

Most of the city's floating rate bonds are hedged in 11 synthetic fixed-rate swaps. The city is not currently considering unwinding any swaps as officials believe over the long-term they remain beneficial to managing the city's floating-rate exposure.

The city, which has traditionally insured most of its bonds, will consider insurance on the upcoming transactions. It's banking on its double-A category ratings to attract investors as attention to underlying credit quality is now the focus for investors. "We will continue to see if there is value in it," Volpe said.

 

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