CHICAGO - Without an urgent need for the proceeds, Chicago decided, in the face of weak institutional demand, to put off until next year its $590 million new-money and restructuring general obligation sale slated for today.
"Chicago wanted to get out of the way of other deals in the market. There's a lot of supply and not a lot of stability," said one market participant working on the sale. "If you don't have to go out and price, it's better to wait until January."
The market had weakened on Monday by a few basis points on the shorter end of the yield curve and as many as 10 basis point on longer maturities for issuers since Friday as retail interest has failed to compensate for the lack of institutional buyers who are winding down their books for the year, according to market participants. The 30-day visible supply is hovering at around $17 billion.
The postponed Chicago deal includes three series - a $327 million new-money and refunding piece, a $60 million new-money tranche, and a taxable new-money and refunding tranche for $203 million. William Blair & Co. is the senior manager.
The deal includes about half new-money and half refunding bonds, with the restructuring aimed at pushing off repayment of about $120 million of debt service payments to benefit the 2008 through 2012 budgets.
"The approximately $300 million in debt restructuring will be used to achieve budget relief through 2012. This is consistent with the mayor's plan of taking a four-year approach," Finance Department spokeswoman Lisa Schrader said recently.
Chicago is projecting savings of about $45 million in the 2008 budget by putting off a Jan. 1 payment that officials would have had to set aside funds for this month. It is unclear how the sale's delay will impact the budget. Another $15 million will be saved in the 2009 budget by restructuring the January 2010 payment and $30 million will be saved in each the 2010 and 2011 budgets by putting off January 2011 and January 2012 payments on outstanding debt.
The pushing off of the $45 million and $15 million payments would help the city close a looming $469 million deficit in the 2008 budget and the 2009 budget adopted last month. Chicago also turned to layoffs, tax increases, and the use of proceeds from two asset leases to fully erase the red ink.
About $150 million will come from the city's pending $1.157 billion lease of its parking meter system and another $40 million from its pending $2.5 billion lease of Midway Airport. Mayor Richard Daley has estimated a structural budget deficit of about $200 million through 2012, but officials have set aside another $60 million from the Midway deal and $175 million from the meter lease toward those gaps. Another $324 million from the meter lease is available in a stabilization fund.
While rating agencies typically view debt restructurings and the use of one-time revenues negatively, all three rating agencies affirmed their ratings on the city's $6 billion of GOs ahead of the postponed sale. Fitch Ratings rates the city AA, Moody's Investors Service rates it Aa3 and Standard & Poor's rates it AA-minus.
Analysts noted the city's credit strengths, including the decision to use about $400 million of the meter lease for a reserve, with interest earnings going to replace the system's current annual revenues, and the city's decision not to tap its existing $500 million reserve for the budget deficit.
"These are relatively small amounts of debt they are restructuring and one-shots as part of a plan cobbled together to restore balance to the budget, so because of the limited size we didn't see it as enough of a negative factor" to downgrade the credit, said Standard & Poor's John Kenward. "They are planning for a crummy economy for the next few years and trying to keep the pressure off the property tax levy."
"Fitch views this temporary budget-balancing solution as acceptable, given the large share of asset sale proceeds set aside as reserves," wrote analysts Amy Laskey and Melanie Shaker. "However, Fitch believes that once sizable non-recurring funding sources are exhausted, management will be challenged to fund its largely inflexible spending requirements."
Michael Scarchilli contributed to this story.