Chicago tweaks finance teams on $1.2 billion refinancing

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Chicago is merging the finance teams chosen for separate general obligation and Sales Tax Securitization Corp. deals to refinance city debt to help close a budget gap.

The syndicates and financial advisors will now serve on both transactions, according to information from market sources that city finance spokeswoman Kristen Cabanban confirmed Tuesday. The move makes the investor marketing process for the deals smoother, Cabanban said. The pair of deals adds up to $1.2 billion.


Chicago’s chief financial officer, Jennie Huang Bennett, has said the city plans to price the deals this month or in early 2020. Market sources said they now expect pricings in January, but Cabanban said the timing remains as soon as this month.

The merged teams put Goldman Sachs, JPMorgan, Cabrera Capital Markets LLC, and Siebert Williams Shank & Co. LLC in the lead spots. Previously JPMorgan and Cabrera were to lead on the GO deal tentatively sized at about $176 million while Goldman and Siebert had the books on about $1 billion of STSC junior lien bonds. Adding GO broker-dealers to the STSC deal boosts them by putting them on the larger transaction.

“I think it’s better for the marketing effort because you can’t get investors to break the two credits apart so if you are promoting one or the other you are still going to get questions on the other deal as the two credits feed off each other,” said one market source. “I think the city will get better execution from a more integrated marketing effort.”

Rating agencies recently affirmed the city’s GO ratings ahead of the deal, but only S&P Global Ratings has published its STSC rating on the new junior lien being established with the transaction. It assigns the junior lien the same AA-minus rating as the senior lien.

Ratings are expected from Fitch Ratings and Kroll Bond Rating Agency. They both rate the STSC’s senior lien AAA.

Trading levels on the STSC bonds are around a 100 basis point spread to the Municipal Market Data’s AAA benchmark compared to a 140 bp spread for the Chicago GO, said Daniel Berger, market strategist at MMD-Refinitiv.

“We have not seen any notable Chicago or Sales Tax Securitization Corporation Bond trades of late,” Berger said.

Chicago saw notable spread narrowing in its last GO sale, a $722 million issue that sold in the spring.

The 10-year in the deal paid a yield of 3.59%, a 169 bp spread to the AAA benchmark, while the 25-year bond in the deal paid a yield of 4.40%, a 180 bp spread to the AAA. Both offered 5% coupons. The city’s previous deal in early 2017 saw spreads of more than 300 bps.

The city’s last STSC deal in early 2019 used a taxable structure. The last tax-exempt deal for $612 million sold in late 2018. The 10-year in the 2018 tax-exempt deal paid a yield of 3.48%, an 83 basis point spread to the AAA. The 18-year bond in the deal paid a yield of 3.96%, an 88 bp spread to AAA and priced to first optional call date. The 25-year bond in the deal paid a yield of 4.15%, an 88 bp spread to the AAA. All offered 5% coupons.

Chicago has about $8 billion of GOs outstanding and sold $2.6 billion of STSC bonds through the bankruptcy-remote special entity that was established in 2017 to refund GOs and other debt at lower interest rates.

The city is now issuing $1.2 billion to refinance $1.3 billion of outstanding GO and motor fuel tax bonds with the ability to push the deals up to $1.5 billion under the ordinance approved by the City Council last month.

The city will trade in average coupons of about 4.9% for rates in the range of 3 to 3.5%. The average life of the bonds being refunded is now 10.3 years and will be trimmed slightly to 10 years while one year will be trimmed off the current 2040 final maturity with lower debt service in every year, according to Bennett.

The city will take at least $210 million of the savings upfront, with some limited additional savings in future years. Mayor Lori Lightfoot’s $11.65 billion budget depends on the savings to help close an $800 million gap that due to rising pension, labor, and other costs.

Officials in Lightfoot's administration acknowledge it’s a one-shot revenue gain but believe it helps lay the groundwork to work toward structural budget balance in 2022.

More than 50% of the underwriting team allocations will go to minority- and women-owned firms, one of the highest levels ever.

RBC Capital Markets had been co-senior manager and Loop Capital Markets, Rice Financial Products, and Melvin Securities LLC co-managers on the STSC bonds with PFM and Public Alternative Advisors LLC as advisors.

Stifel had been the co-senior manager and Estrada Hinojosa, Harvestons Securities, and BofA Securities were co-managers on the GOs. Columbia Capital Management LLC and Swap Financial Group were advisors.

The GOs are rated BBB-minus by Fitch, A by Kroll, and BBB-plus by S&P. All assign a stable outlook. Moody’s affirmed the city’s Ba1 rating, one notch below investment grade, and stable outlook last week, but Chicago does not ask Moody’s to rate new deals.

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