CHICAGO — The Chicago Transit Authority heads to market as soon as Wednesday with $456 million of sales tax revenue bonds and as much as $96 million of new-money and refunding capital grant-backed bonds to fund the purchase of rail cars.
Wells Fargo Securities is senior manager and Morgan Stanley is co-senior. Katten Muchin Rosenman LLP is bond counsel and Charity & Associates PC is co-bond counsel. A.C. Advisory Inc. and Public Financial Management Inc. are financial advisors. The CTA may go with insurance coverage from Assured Guaranty Municipal Corp. at the pricing if it lowers its overall borrowing costs.
“If it’s cost effective to use the insurance we will,” said the CTA’s chief financial officer Karen Walker. The deals marks the agency’s first major issuance of tax-exempt sales tax receipt bonds as most of its past debt under the credit was sold as taxable.
“These bonds are a good opportunity to bring new buyers to the credit,” she said.
Walker added that because of the low interest environment, the financing provides the most affordable means to move quickly on upgrading its fleet of rail cars by purchasing 300 new ones. The move will help lower overall maintenance costs and improve service.
The deal faces headwinds in the form of headlines describing the authority’s budget struggles and exposure to state payment delays, one of the factors investors assess as they tack on interest rate penalties for Illinois-based borrowers due to the state’s fiscal woes.
In its favor, state delays have eased, the rating agencies affirmed the ratings assigned to both credits, and potential buyers who attended a Chicago-sponsored investor conference last week praised the city, the CTA and other city-related agencies for their outreach.
“It was good to see and hear from the city and the other agencies that they have a handle on their financial issues,” said Patrick Morrissey, a managing director in tax-exempt strategies at Great Lakes Advisors Corp. Several investors said the outreach could help improve investor appetite for city-related paper and shave some basis points off the so-called Illinois penalty, but that also depends on structuring details and market conditions at pricing.
The capital grants are rated A1 by Moody’s Investors Service and A by Standard & Poor’s while the sales tax bonds are rated Aa3 by Moody’s and AA by S&P. Assured is rated Aa3 with a negative outlook by Moody’s and AA-plus on credit watch negative by Standard & Poor’s.
CTA president Forrest Claypool — installed earlier this year by Mayor Rahm Emanuel following his election — last week unveiled a $1.24 billion operating budget for 2012 that relies on union concessions and management spending cuts to close a $277 million gap. Management cuts will save $117 with the remaining deficit closed the proposed work rule changes, health-care benefit changes and limiting wage growth.
The budget proposal submitted to the CTA’s parent — the Regional Transportation Authority of Illinois — represents a 5% decrease over its current spending plan. If the CTA fails to win over unions on work rule and wage changes, officials warned the agency may have to cut up to 1,000 positions, slash service and possibly raise fares.
“Absent fundamental reform, including an end to cumbersome union work rules, the CTA’s longstanding financial problems will remain. But with leaner and better management, labor reform, and aggressive service improvements, we can permanently fix CTA’s finances, preserve good jobs, increase ridership, and invest in our future,” Claypool said.
The ratings on the capital grant bonds apply to a total of $860 million of debt including the upcoming issue that leverages federal transit grants. The figure includes $535 million of outstanding Section 5307 grant-backed bonds and $326 million of Section 5309 bonds.
In addition to raising new money, the CTA will restructure a piece of its 5307 bonds by delaying some near-term principal repayment to provide room in its debt portfolio for the new-money issuance, Walker said.
The credit benefits from stable federal funding and the transit agency’s strategic role in the region’s transportation network and a pre-funding of debt service from prior year federal funds. Challenges include federal aid reauthorization risk, lack of debt service reserves and a longer final maturity of 2029 than comparable securities.
The new-money sales tax revenue bonds will bring the CTA’s total outstanding parity issuance under that credit to $2.5 billion. The credit’s strengths include a pledged revenue stream of the agency’s share in sales taxes collected in the region, strong debt service coverage, and an improved pension fund status.
Offsetting those strengths is the challenge posed by economic conditions on sales tax collections and the agency’s vulnerability to chronic state-payment delays. Moody’s noted that the delays have eased as Illinois’ liquidity improved following an income tax increase approved early this year. The agency also continues to struggle to identify ways to fund capital projects as it faces $6.8 billion of unfunded capital needs.
Fitch Ratings did not rate the bonds. Last year it assigned a negative outlook to the CTA’s capital grant bonds because it took a critical view of the agency’s $100 million restructuring for budgetary relief. Investors will have a good amount of sales-tax backed paper to absorb from the state as the CTA will follow Illinois’ competitive sale of $300 million of bonds scheduled for Tuesday.
