CHICAGO — Morgan Stanley on Wednesday priced Chicago's $746 million of taxable general obligation securities with the deal's long bond paying a yield 485 basis points over the 30-year U.S. Treasury rate.

That's a steep jump from the 265 basis point spread the city paid on its 30 year bond in its last taxable issue in 2014 well before Moody's Investors Service cut the city's GO rating to a speculative grade. The tax-exempt piece of the overall $1.1 billion sale will be priced Thursday.

The scale released by bookrunning senior manager Morgan Stanley showed steep concessions being offered to investors over taxable municipal paper that carried similar triple-B to single A ratings based on the Municipal Market Data's taxable municipal scale.

"I think the spreads on the taxable look attractive. They're very comparable to high yield corporate names in the low BB/High B range," said Triet Nguyen, co-head of municipals and corporate credit at New Oak. "Of course, from the city's standpoint, that's a significant yield penalty."

The deal offered about $28 million of paper maturing between 2019 and 2023 with a coupon of 5.383% on the early 2019 serial maturity and 6.361% on the 2023 serial. The prices reflected spreads of 375 basis points to 415 basis points over comparable Treasuries, down from a high of 435 based on an early indications scale released earlier in the day.

A 2033 term bond for $322 million was priced as 7 3/8s to yield 7.45% and a 2042 term for $397 million was priced as 7 3/4s to yield 7.98%. The terms were priced to the average life of the 2033 and 2042 maturities of 15.421 years and 20.787 years, respectively.

The pricing wire didn't mention a 25 basis point discount coupon on the 2042 term bond that accompanied the maturity in the early indications scale.

Treasury prices were higher on Wednesday, with the yield on the two-year Treasury note falling to 0.63% from 0.64% on Tuesday, while the 10-year yield fell to 2.35% from 2.40% and the 30-year yield decreased to 3.13% from 3.19%.

The serials and 2033 term offer investors the corporate market make-whole call provision set at the Treasury rate plus 50 basis points while the 2042 term features a traditional municipal 10-year call.

Municipal Market Data's taxable municipal scale on Tuesday put the yield on a 2033 maturity on an A rated credit at 4.77 % and 5.45% on a triple-B credit with an A-rated taxable 2042 maturity Tuesday at 4.86 % and a triple-B credit at 5.55 %.

The taxable piece is part of a larger $1.1 billion GO sale with the remainder offering tax-exempt paper. The big taxable piece is due to the city's plan to use proceeds to cover short-term operating expenses that would run afoul of long-term tax-exempt financing rules under the Internal Revenue Service code. The city is expected to pay yield penalties of between 250 and 300 basis points on the tax-exempt piece.

The bonds are rated BBB-plus by Fitch Ratings and Standard & Poor's and A-minus by Kroll Bond Rating Agency. Moody's Investors Service, which rates the city's $8 billion of GO debt at the speculative grade level of Ba1 with a negative outlook, was not asked for a rating. Chicago faces a roughly $420 million budget gap in its $3.5 billion general fund and a looming $550 million spike in police and fire contributions.

The city's last tax-exempt sale in late May came at spreads to the MMD top-rated benchmark of 293 basis points on the 10-year maturity and 264 basis points on the longest 27-year maturity. That deal did not include taxable paper.

On the city's 2014 sale, the city's 30-year taxable maturity landed at 265 basis points over Treasuries. On its previous sale in 2012, the city's 30-year taxable bond priced at 252.6 basis points over Treasuries.

Chip Barnett contributed to this story.

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