As if Chicago didn't have enough problems lately, investors have now turned their noses up at the city's latest bond sale.
Chicago went to market Wednesday with $454.37 million of Sales Tax Securitization Corp. refunding bonds, in the midst of heated 2026 budget negotiations and on the heels of a rejection by the City Council's finance committee of Mayor Brandon Johnson's revenue plans.
The deal saw the credit's spread widen significantly from a sale last December, and lead underwriter Goldman Sachs took down about $75 million of unsold bonds, Bloomberg reported.
Goldman Sachs declined to comment.
The first tranche, $207.83 million of Series 2025A refunding bonds (/A+/AAA/AAA/), saw yields range from 3.35% with a 5% coupon in 2035 to 4.65% with a 5% coupon in 2046.
The second tranche, $193.94 million of Series 2025A second lien refunding bonds (/A+/AA-/AA+/), saw yields range from 3.234% with a 5% coupon in 2026 to 4.68% with a 5% coupon in 2045.
The third tranche, $52.605 million of Series 2025B taxable refunding bonds (/A+/AAA/AAA/), was priced at par, with yields ranging from 4.25% in 2026 to 4.739% in2033.
On Dec. 6, 2024, the STSC priced a refunding series for which the 10-year priced to yield 3.26%, according to the scale posted on EMMA. That was a 61 basis point spread to the MMD triple-A GO benchmark (2.65%), according to LSEG's TM3 Municipal Market Monitor.
On Thursday, the STSC 10-year priced to yield 3.46%, a 66 bp spread to the same benchmark (2.75%).
"Chicago's new Sales Tax Securitization issue appears to have had resistance in certain maturities," Kim Olsan, senior fixed income portfolio manager at NewSquare Capital, said by email.
"Any reported balances may be due to two factors," Olsan said. "The first would be specific to the city's budgetary issues. Another component would be the apparent risk-off moves in certain revenue categories, where buyers may be putting a greater focus on higher-rated bonds, subsequently commanding wider spreads in down-in-credit names."
The deal hit a perfect storm of uncharacteristically weak technicals, volatility and high deal volume that revealed how vulnerable Chicago's credit is, said Justin Marlowe, research professor at the University of Chicago's Harris School of Public Policy and director of the Center for Municipal Finance.
The large calendar included several mega deals, as
"It's the same narrative we have seen for a long time now, certainly the last 18 months, which is strong technicals propping up Chicago's weak fundamentals," Marlowe said. "I think we had all known that that would not continue indefinitely."
The question now, he said, is whether these market technicals are a sign of things to come — in which case Chicago's credit will see this type of weak demand and spread widening for some time into the future — or whether this week has been a bit of an anomaly.
"I would absolutely take the weak demand on the recent STSC deal as a reason for Chicago to very carefully think through its debt management strategy going forward," Marlowe said.
Taking money from one pot to pay another may remind investors of Puerto Rico's past debt fiascoes, said Tim McGregor, managing partner at Riverbend Capital.
"It's just not a good sign," he said. "New York City did a little bit of it; not to the same degree, though. You don't want to blur those lines. Bond investors don't like that."
How Chicago has handled STSC revenue could have held up the sales tax credit on Wednesday, as well, he speculated.
In a recent outlook report, Municipal Market Analytics highlighted Chicago's STSC credit, criticizing the city's tendency to tap the STSC credit for debt service relief, using it "to regularly produce near-term savings without reducing principal outstanding."
Notwithstanding the STSC's strong legal structure, "its durability could be tested if sales tax growth falters or the city's structural gap widens to the point that residual sales tax revenues can no longer comfortably maintain essential services and pensions," possibly creating political pressure to tinker with the STSC's legally constructed isolation, MMA said.
MMA Chief Credit Officer and Managing Director Lisa Washburn said the STSC bonds were probably affected mostly by general weakness in the municipal market, "but the recent news and noise around Chicago's credit profile and budget process probably added to the challenges it faced," she said by email.
"Even if the STSC is intended to be insulated from the city's fiscal issues, the STSC has become an integral tool in helping to balance Chicago's budget and the strong economic and fiscal connection between the two makes it difficult for investors to fully compartmentalize the negative developments," Washburn added.
"We don't like the credit trends," Riverbend's McGregor said. "The whole idea about refunding money when spreads are widening … You can't refinance a 6% mortgage with a 7% mortgage. As spreads widen, the amount of refunding savings goes down … Are you just going to have to extend the term structure?"
"Chicago credit has been in the headlines recently, from the recent S&P outlook revision to the pension and budget sound bites," Mohammed Murad, head of municipal credit research at PT Asset Management, said by email. "While securitizations, whether on a sales tax deal like STSC or utility deals, have sound fundamental features that may insulate them from weakness in the underlying credit, how and frequency of use may start to weigh in on market perception.
"In my opinion, it is not that different from kicking the can down the road on underfunded pensions," he added. "In a securitization's case, it is spreading costs over a long period of time making them potentially more manageable today. At some point these lines start to become less sharp."
Marlowe said the weak demand reflects investor perceptions of Chicago's decision-making process as much as its credit fundamentals.
"What's happening with the budget now is a continuation of a long trend that investors have been watching," he said. "How you make these decisions matters."
Marlowe questioned the Johnson administration's narrative that
"If investors are responding to what they see as a fraught decision-making process, then the best thing Chicago can do … is to put structures in place to make sure that the governance around future settlements and back pay is much stronger and is planned for appropriately," he said.
McGregor said the news for Chicago is not all bad.
"The quantum computing is kind of the silver lining for Chicago," he said. "When push comes to shove, I think Chicago needs more people. You need incentives for people to come here. And that's a good example of something that looks like it's got great potential."
Moody's Ratings rates Chicago general obligation bonds Baa3 with a stable outlook after a revision from positive in September. KBRA rates Chicago GOs A-minus, with a negative outlook.
S&P Global Ratings assigns Chicago a BBB rating with a negative outlook after an outlook revision earlier this month. Fitch Ratings rates the GO credit A-minus and cut the outlook to negative in May.
The city's finance team did not respond to a request for comment by press time.
