CHICAGO -- Chicago will delay a $380 million market appearance for at least a week, and may tinker with the deals' size and composition with the aim of keeping its borrowing costs in check after its fall to junk.
That's the word from city officials Monday.
The city initially intended as soon as Tuesday to remarket $182 million of 2003 general obligation paper and $201 million of 2002 bonds, converting them from floating rate to fixed.
Siebert Brandford Shank & Co. LLC is senior manager on the 2003 bonds that currently reset weekly and Ramirez & Co. Inc. is senior manager on the 2002 bonds that reset daily.
Word began circulating among market participants Monday that the deals would be postponed a week although it remained unclear how they might be altered in size or structure.
Later Monday, city officials said they opted to delay the transactions in order to "make potential adjustments to our market strategy to protect taxpayers."
The city remains on track to remarket all $800 million of its floating-rate GOs as fixed-rate by mid-June, officials said.
"We are evaluating specific options to achieve the lowest borrowing cost for Chicago taxpayers in light of the action Moody's took last week. This could mean converting all four series at once or in two separate tranches," city officials said. "Some likely adjustments to specific grouping and specific timing" may be made.
The city previously had planned to planned to return in the coming weeks to convert two additional floating issues from 2005 and 2007 to fixed rates, each for about $200 million. The city published a mandatory tender and optional redemption notice May 14 on the 2007 bonds and May 13 on the 2005 bonds, with June 8 purchase dates. The city previously published similar notices on the 2002 and 2003 bonds.
The four floating-to-fixed conversions are aimed at reducing the city's risks tied to bank credit support ease liquidity pressure on Chicago now that banks are in position to demand up to $2.2 billion in debt repayment due to termination and default events triggered by Moody's Investors Service's May 12 downgrade of the city to junk.
The first sign the deals were on hold came Monday morning when the city had not updated the offering statements on the Ramirez and Siebert transactions to reflect the Moody's downgrades and subsequent downgrades from Fitch Ratings and Standard & Poor's.
Moody's dropped $8.9 billion of GOs, sales tax and motor fuel bonds to the speculative grade level of Ba1 and assigned a negative outlook. Fitch and Standard & Poor's then both downgraded Chicago, though both maintain investment grade ratings, citing liquidity risks triggered by the Moody's downgrade. Some city GOs in secondary market trading last week jumped to 300 basis points over the Municipal Market Data's top-rated benchmark.
The deal deferral came as Mayor Rahm Emanuel was inaugurated his second term Monday and with new chief financial officer Carole Brown, a public finance banker at Barclays, coming on board to replace Lois Scott.
In his inaugural address, Emanuel briefly acknowledged the need to tackle to the city's fiscal challenges but focused his speech on the need to aid the city's disadvantaged youth.
Since the downgrades, market participants have roundly called on the city to show better political will to tackle its $20 billion unfunded pension liabilities.
"Chicago certainly has the ability to reverse its fiscal course through some combination of revenue increases, expenditure reductions and other measures," wrote Alan Schankel, a managing director, in Janney Capital Markets' fixed-income weekly commentary published Monday. "The question now is whether the city and its leaders (and voters) have the willingness to take necessary but difficult steps."
Municipal Market Analytics wrote its weekly outlook Monday: "While we continue to expect that Chicago's credit strengths will outweigh the risks of non-payment to bondholders, it is clear that both short- and long-term challenges are rising."
MMA said it was concerned about Emanuel's comments in an interview last week on Chicago Tonight, a local news program on public television, in which he did not outright dismiss Chapter 9 as an option.
"His comments may have been intended to cajole the unions to agree to pension concessions, but this is a sharp break from earlier statements dismissing Chapter 9 entirely. Remember that Chicago's and Chicago Public School's lack of Chapter 9 access under state law allows for a more traditional and favorable reading of the relative security pledged to repay bondholders," MMA wrote.
Moody's action was prompted by concerns over the negative implications for city pension reform created by the Illinois Supreme Court's recent voiding of state reforms. The liquidity risks prompted Fitch to lower the city's rating one notch to BBB-plus and Standard & Poor's two notches to A-minus. Both threatened further action if the liquidity issues aren't resolved in the city's favor.
Also Monday, Moody's put out a special report addressing questions it's received since the downgrade elaborating on why it acted before the legal challenge to city reforms was resolved and why it didn't act first on the state's credit.
Moody's also addresses the question of whether the speculative grade reflects a serious risk of default.
"Moody's ratings speak to both probability of default and expected loss upon default. The Ba rating range implies speculative elements in the risk profile but only a relatively small risk of default" of 5% over a three-year horizon for Ba credits, the report said. "We do believe, however, that the city's pension-related challenges are significant and introduce speculative elements into the credit profile."