Chicago MWRD Pays Limited Penalty

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CHICAGO – The Metropolitan Water Reclamation District of Greater Chicago sold $427 million high grade paper at what a local bond trader calls a "fair" market penalty given the tarnished names of Chicago and Illinois.

The deal that priced Monday offered a mix of refunding bonds and green bond-designated new money.

Ahead of the sale, the district lost one of its triple-A ratings because of the collective pension and debt burden of Chicago and the other local governments that share the same tax base.

S&P Global Ratings downgraded Met Water to AA-plus from AAA Friday.

Fitch Ratings affirmed the district's AAA rating and stable outlook. Moody's Investors Service rates the district Aa2, although the district didn't ask it to rate the new deal.

On the refunding that lacked a green bond designation, the deal's 10-year unlimited tax GO maturity paid a yield of 2.16%, 54 basis points over the MMD top-rated benchmark and 34 basis points over a double-A benchmark. The 10-year limited tax GOs yielded 2.21%.

The 10-year green bond designated ULTGO paid the same yield of 2.16% and the LTGO paid the same yield of 2.21%.

The long 2045 maturities were placed only in ULTGO green series and paid a 2.86% yield, 47 basis points over MMD triple-A and 28 basis points above the double-A.

The district paid a penalty but it was not too steep given that most Illinois credits, even top ones, pay one for their location in a fiscally troubled state without a budget. The water district is further dinged for the Chicago name, said Brian Battle, director of trading at Performance Trust Capital Partners.

"The spreads are very fair" given the taint of the Chicago name and state location, Battle said. "The market knows it's a strong credit that provides an essential service."

The deal was also helped by strong investor demand for municipal paper.

The district's ratings benefit from the local economy and its own strong fiscal performance supported by high reserve levels.

Fitch said the AAA rating "reflects the district's superior budgetary flexibility which underpins its stable financial performance and low long-term liabilities. Conservative management of both operational and capital mandates suggests continued strong financial performance throughout the economic cycle."

The district undertook pension reforms in 2013. The package raised employee and employer contributions but did not cut benefits to reduce liabilities.

Chicago's pension cuts were tossed this year by the courts. The district plan has not been challenged but still could be, rating agencies and the Chicago Civic Federation have warned.

The funded ratio remains low, but is improved at 55.2%. It was at 50.4% before the reforms took effect. The district has $1.1 billion of net pension liabilities. Its plan puts it on a path to achieve 100% funding by 2050.

The district's available general fund reserves totaled $220.4 million, or 65% of expenditures, last year. The district's general corporate fund held $236.8 million of cash and investments at year end.

Bank of America Merrill Lynch senior managed the deal.

The 125-year-old district has a $2.3 billion capital program. It serves five million residents from 125 communities, treating 1.3 billion gallons of wastewater daily. The district last sold debt in 2014.

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