CHICAGO – The Chicago Transit Authority prices a nearly $230 million refunding of its federal capital grant-backed bonds Tuesday after reporting it expects a less than 2.5% loss in state funding under the new fiscal 2018 Illinois budget.

The deal is broken into two series, one for $91 million of bonds backed by the CTA’s share of Federal Transit Administration Section 5307 urbanized area formula funds, and the other $137 million series backed by FTA Section 5337 state of good repair formula funds.

The deal, which carries a final 2026 maturity, will refund outstanding bonds “for economic savings” with no maturity extension, said CTA’s chief financial officer, Jeremy Fine. Morgan Stanley is running the books.

A Chicago Transit Authority train on the Loop in downtown Chicago.
The Chicago Transit Authority heads into the market Tuesday with a refunding. Adobe Stock

The deal was originally on the calendar for last week but CTA officials said the finance team decided to wait a week to let the market digest $9 billion of post-holiday supply. In the interim the CTA posted a supplement disclosing its initial review of the state’s new budget.

The CTA faces a cut in public transportation matching funds, sales tax receipts, and other subsidies totaling less than 2.5% of its current budget that runs through the end of the year. “While the above analysis of the approved state budget is preliminary and no assurances can be given, the authority does not currently a material adverse effect on its financial condition or operations during the period covering by the approved state budget as a result of the state funding reductions,” the supplement says.

Ahead of the sale, Fitch Ratings affirmed the BBB rating it assigns to the CTA’s $587 million in outstanding capital grants receipts revenue bonds and S&P affirmed the A rating it assigns to the 5307 bonds and upgraded its rating on the 5337 bonds one notch to A-plus due to coverage ratios. All carry a stable outlook.

Fitch said despite its February downgrade of the state to BBB, it considers bondholders sufficiently insulated as grant receipts flow directly to CTA from the U.S. Department of the Treasury.

“A distinct credit feature of these bonds is the fact that the CTA receives funds directly from the FTA without intermediaries, thereby insulating bondholders from risks that might be associated with passing the money through the state or other agencies,” Fine said in an investor presentation.

Fitch said its rating reflects the FTA program.

“The current program's growing gap between receipts and outlays, coupled with the absence of a long-term funding solution, render the Highway Trust Fund dependent on future general fund transfers to remain solvent,” Fitch wrote. “Future policy uncertainty is somewhat mitigated by the program's long history of providing temporary legislative solutions to meet funding needs.”

While it faces some operating aid cuts, the CTA stands to benefit from the new state budget because funding levels are more certain and the state may be able to speed up payments due to an income tax hike and other measures aimed at lowering a bill backlog. The state owes more than $600 million to the CTA’s fiscal parent – the Regional Transportation Authority.

On the capital side, the CTA remains starved for help as a prior state public works program expires. In the absence of state help, the CTA has turned to alternative financings. It has entered several Transportation Infrastructure Finance and Innovation Act loans. The agency won a roughly $1 billion federal grant for the first phase of a more than $2 billion overhaul of two rail lines and has a special use tax-increment financing district in place to generate the needed local matching funds. It hopes to leverage those funds with a $622 million TIFIA loan.

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