CHICAGO – Chicago’s downsized and refashioned sales tax securitization may fare better than the original deal that was delayed a week, several market participants said.

Goldman Sachs is slated to pre-market on Monday $361.9 million of tax-exempt paper being sold by the city’s Sales Tax Securitization Corporation with a pricing tentatively slated for Tuesday.

Late Sunday, the securitization entity published a supplement to the sale documents, notifying the market that it was selling a $361.9 million tax-exempt piece and a $300 million taxable piece that matures in 2048 with a make-whole call feature.

It marks a downsizing of the originally planned $898 million issue, one that “is a lot different from the original” with broader appeal offered by the taxable piece, said one market participant.

Triet Nguyen, head of public finance credit at NewOak Capital.
"Perhaps market participants are balking at the longer maturity structure offered by the new issue," wrote Triet Nguyen, head of public finance credit at New Oak.

Proceeds will refund outstanding city general obligation debt, and the use of taxable debt offers the ability to advance refund GOs, which is no longer allowed on a tax-exempt basis under the new federal tax law.

The taxable tranche should appeal to corporations and insurance companies and others beyond the traditional municipal universe looking for yield and a high-quality credit. The index-eligible designation adds further appeal because of its liquidity and the fact that “a lot of investors will only buy index eligible” bonds, said another buyside representative, Lyle Fitterer, senior portfolio manager at Wells Capital Management.

After taking indications on the deal -- upsized to $898 million from $795 million -- the city chose to delay the all tax-exempt issue just ahead of Wednesday's planned pricing. The market had been eagerly awaiting an order period for the bonds expected to offer a attractive yields due to the market penalty caused by Chicago’s weak ratings, despite the corporation’s double-A and triple-A ratings and bankruptcy-remote attributes.

Chicago’s chief financial officer, Carole Brown, later Wednesday said the decision was driven by the market's tone, though it had opened in more stable territory. She cited the need to digest shifting market appetites in the aftermath of December’s tax reform legislation, a flattening yield curve, and elevated muni-to-Treasury ratios to offer a structure more suited to current market demand, with an eye on adding taxables.

The delay prompted speculation among market participants over whether the city had lost key buyers or it was too soon for the market to digest another big chunk of paper from the credit after its $744 million issue that was easily placed in early December.

“The word on the street … was that the premarketing spread of 45 bps off AAA on the 2048 maturity (assuming a 5.00% coupon structure) failed to elicit much excitement from investors,” Triet Nguyen, head of public finance credit at New Oak, wrote in the firm’s MuniCredit Insights published Friday.

The 10-year tax-exempt bond in the $744 million December sale landed at a 23 basis point spread to the Municipal Market Data’s AAA benchmark after being repriced as yields fell around 10 basis points that day.

“We can only speculate as to what may have happened. Perhaps market participants are balking at the longer maturity structure offered by the new issue, particularly given the current bearish attitude among fixed-income investors,” he added.

The tax-exempts being pre-marketed Monday offer serial maturities from 2031 to 2038 with $207 million in a 2048 term bond and an optional call in 2028. No additional details on the taxable piece were immediately available.

The sale previously was slated to come with serials also from 2031 to 2038 with most of the debt in term bonds tentatively set for $168 million due in 2043 and $431 million due in 2048. The December sale offered $175 million of tax-exempt paper and $400 million of taxable securities.

While the structure may appeal to a wider audience, it’s up in the air whether the city will find an improved “market tone” as the market digests about $7 billion in supply. The market was weaker Friday as investors weigh upcoming Fed meetings and the possibility of a government shutdown. Inflows helped add some stability but failed to spark much of a rally.

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