Chicago follows up successful pricing with second bond deal

Bloomberg News

The week after it sold $687.3 million of bonds on June 4, Chicago returned to market with $82.55 million of general obligation bonds for housing and economic development projects in a deal set to close Monday. 

The deal had been scheduled to price this week, but Chicago seized on a firming up of munis late in the week of June 9.

"Following strong investor demand for the (earlier) general obligation bonds… the city accelerated its plan of finance and returned to the market with its (Series 2025F and 2025G) bonds on Thursday, June 12," the office of Chief Financial Officer Jill Jaworski said in a statement. "The city was able to again take advantage of a positive market tone."

Ramirez priced for Chicago $82.55 million of GOs for housing and economic development projects. The first tax-exempt tranche, $66.46 million of Series F bonds, priced with yields from 5% on a 2040 maturity and a 5.5% coupon to 5.53% for the 2055 with 6% coupons. The bonds have a standard municipal 10-year call provision.

The bank also priced for the city $16.09 million of taxable Series G bonds, with all bonds priced at par: 5.4% for the 2028 maturity, 5.65% for 2030 and 6.25% for 2035..

Whereas the $687.3 million of Series 2025ABCDE bonds had a final maturity of 2050, the final maturity on the Series 2025F bonds is 2055.

The transaction realized a true interest cost of 5.8%, the city's finance team said. 

"Although the principal amount of the 2025FG bonds was significantly smaller, the FG transaction received approximately $395 million of orders from nearly 20 accounts," the finance team said. "And the city achieved substantial interest savings on repricing of the tax-exempt F series as well as tighter spreads on the tax-exempt F series than the tax-exempt portion of the 2025ACBDE transaction."

Ramirez & Co. and PNC Capital Markets were co-lead managers on the deal. Chapman and Cutler and Charity & Associates were co-bond counsel. PFM Financial Advisors, RSI Group and Sustainable Capital Advisors were co-financial advisors.

"Chicago's credit continues to trade really well despite all of the lingering fiscal and governance concerns," said Justin Marlowe, research professor at the University of Chicago Harris School of Public Policy and director of its Center for Municipal Finance. 

However, he pointed to the CMF's Muni Index, which showed double-digit positive changes for most of the nation's top cities between April 16 and June 18. New York City saw a 44.15% price improvement. Boston saw a 38.8% improvement, Houston a 27.91% improvement, San Francisco a 33.59% improvement and Columbus a 26.17% improvement. 

Chicago, by contrast, saw a 1.35% improvement. The only other cities in the index with single-digit percent improvements were New Orleans, Dallas and Philadelphia. 

"Chicago is one of the only big cities that has not seen noticeable price improvements throughout the past three months," Marlowe said. "(The city) has missed out a little bit on some improvement in the market. But they're not at a point where they're being punished for their fiscal and governance issues."

The bonds were rated A-minus with a negative outlook by Fitch Ratings and KBRA, and BBB with a stable outlook by S&P Global Ratings. Moody's Ratings, which was not hired to rate the deal, rates the city Baa3 with a positive outlook.

"There aren't many brand name credits in the high-yield space," Marlowe said. "Because it's one of the very few, the demand is propped up a little bit."

But as the muni market keeps stretching the boundaries of record new issuance, Marlowe warned that Chicago's credit "could see a little bit more resistance, given that there's a lot of other paper available."

The bond proceeds from the more recent deal will finance affordable housing and community development programs, fund capitalized interest and pay costs of issuance. 

Fitch noted that the negative outlook it assigned in May reflects the city's lack of progress toward permanent and impactful solutions to its structural budget gap, estimated at more than $1.1 billion for 2026.

Marlowe noted that Chicago ranks in the top five among 25 major cities in the per capita amount of revenue it receives from other governments, including the federal government, "so that is a vulnerability."

The federal landscape is the top near-term threat, but over the longer term, the structural deficit issue still looms, he said.

"We're all watching carefully to see if there are going to be more downgrades," Marlowe said.

"The mayor has taken some public steps to make clear that they want this coming budget process to be different, and I'll be curious to see if the market responds to that," he said.

"How are they going to make the tough decisions to make a budget that is consistent with everyone's priorities? It's going to be a lot more difficult this time around," he added. "They're going to have to grapple with the much more fundamental questions."

Jessica Lerner contributed reporting.