CHICAGO – Chicago’s City Council signed off on $900 million of water and wastewater borrowing, deals that join a parade of planned 2018 bond deals that include a $750 million sales tax securitization and the first tranche of borrowing under a $4 billion airport revenue bond authorization.
With the city set to host its annual investors conference in early August, the deals give the buyside plenty to digest along with the 2018 annual financial analysis and comprehensive annual financial report that will be available by then.
The city intends to sell up to $500 million of new money and refunding water enterprise revenue bonds and up to $400 million of new money sewer enterprise revenue bonds. They are secured by net revenues of the systems primarily raised from customer charges. Both deals are slated for the third or fourth quarter.
Mesirow Financial and Williams Capital are co-senior managers with Mesirow running the books on the water and Williams on the wastewater. Sycamore Advisors LLC is pricing advisor and RSI Group LLC is advisor. The bond counsel firms are Reyes Kurson, Schiff Hardin LLP, Golden Holley James LLP, and Sanchez Daniels & Hoffman LLP.
The city is also authorized to borrow up to $400 million in low-cost loans for water projects and $200 million in loans for wastewater projects through the state revolving fund loan program over the next three years. The state borrows under its SRF credit through the Illinois Finance Authority to provide loans.
Proceeds of the water loans “will be used for low-cost funding for water capital projects including meter installation, water main construction and pumping station improvements,” according to finance department documents. Proceeds of the wastewater loans will cover costs for “flood abatement, sewer replacement and lining and auxiliary outlet sewers.”
The city sold $200 million of water bonds and $400 million of wastewater paper last June and returned with a $200 million water transaction late last year. The two systems’ issues under a second lien were rated A with a stable outlook by S&P Global Ratings, AA-minus with a negative outlook by Fitch Ratings, and AA-minus with a stable outlook from Kroll Bond Rating Agency.
Moody’s rates the water credit at Baa1 and Baa2 depending on the lien and the wastewater at Baa2 and Baa3 depending on the lien. Chicago no longer asks for Moody’s ratings on deals.
The city pays some credit spread penalties due to its weak general obligation credit and worry that strains from the city’s pension burden will spill over to its enterprise systems, but they are limited.
In a December report, S&P said “approved rate increases and expense control, both for operating and capital expenses, should help support the rating at its current level.”
The city has $2.1 billion of outstanding water bonds and $1.6 billion of wastewater bonds.
The city is facing a new Fitch disclosure on its water, wastewater and O’Hare deals which the firm now includes in all pledged special revenue reports due to fallout from Puerto Rico's Title III bankruptcy.
“A January 2018 district court ruling that dismissed claims regarding payment of Puerto Rico Highways and Transportation Authority debt has raised questions about the scope of protections provided by Chapter 9 of the U.S. Bankruptcy code to bonds secured by pledged special revenues. Fitch’s rating criteria treat special revenue obligations as independent from the related municipality’s general credit quality. The outcome of the litigation could result in modifications to Fitch’s approach,” the disclosure reads.
The Puerto Rico decision is under appeal. Fitch had warned in a February report that “a final court ruling that payment of special revenue obligations during a bankruptcy is optional would create uncertainty about full and timely payment of special revenue obligations” and could potentially limit special revenue obligations backed bonds to issuer default ratings.
It cited Chicago’s airport, water, and sewer bonds as examples. It rates Chicago at BBB-minus.
Chicago's sales tax securitization bonds would not be affected because the corporation is a separate entity that Fitch believes would be insulated in a city bankruptcy.
Restructuring specialist James Spiotto of Chapman Strategic Advisors believes the decision will be reversed on appeal as 1988 Chapter 9 amendments make clear the protections afforded to special revenues and he believes the Puerto Rico decision improperly relied on non-applicable case law and legislative history.
“The financial condition of the municipality should not limit the creditworthiness of the special revenue pledge by a municipal enterprise because that dedicated pledge is to be unimpaired,” he said.
The city plans in the third or fourth quarter a third tranche of borrowing through its Sales Tax Securitization Corp. to refund about $750 million of general obligation debt for savings. Stifel Financial Corp. is senior manager.
The city had planned a nearly $900 million tax-exempt sale in January – a follow-up to the $744 million debut last December – but held the deal citing a tougher “market tone” following federal tax reform and rising rates. It returned the following week with $376 million of tax-exempts and $304 million of taxables.
The city’s 2018 budget relies on about $90 million of savings tied to the refunding of existing bonds using the securitization corporation’s bankruptcy-remote structure.
The paper carries a AA rating from S&P and AAA ratings from Fitch and Kroll but the market demands spread penalties due to the city’s weak GO ratings that range from a low of junk at Ba1 from Moody’s to the single-A category from Kroll, with Fitch and S&P Global Ratings in the triple-B category.
The first deal for the $8.5 billion O'Hare Airport terminal makeover is not yet sized. The city approved a new airline lease and use agreement by the council and airlines earlier this year.
The council has approved an initial $4 billion in bonding under the city’s general airport revenue or passenger facility charge credits. The “financing plan is being developed,” the city said.
In May, Chicago Chief Financial Officer Carole Brown said she was looking to speed up deals with interest rates on the rise this year due to the Federal Open Market Committee’s hikes in the federal funds rate and comments that additional increases are coming.
“That’s why we are now looking at possibly doing O’Hare before the end of the year, because we have to so much O’Hare debt to do that every 25 basis points is a real cost,” Brown said.
The city’s sales for O'Hare have fared well with the market demanding little penalty in recognition of the separation of airport revenues from the city’s corporate funds. Moody’s and S&P and Fitch rate O’Hare general airport revenue bonds at A2 and A, respectively, and Kroll assigns an A-plus rating.
The city has about $7 billion of O’Hare debt outstanding. While rating agencies have praised the terminal plans, it unclear whether the city’s ratings will hold firm given the ballooning debt load.