Chicago's Brown plots city deals with an eye on rising rates
CHICAGO – Faced with climbing interest rates, Chicago wants to speed up planned bond sales, including the first borrowing under an initial $4 billion authorization for O’Hare International Airport’s $8.5 billion terminal makeover.
“We expect at least two Fed actions and maybe even three before the end of year. If you watched MMD [Municipal Market Data rates] it keeps going up and up,” said Chicago's chief financial officer, Carole Brown. “We are watching that and we are concerned about that.”
The Federal Open Market Committee raised the federal funds rate target to the 1.50% to 1.75% range at its March meeting, and is expected to hike another 25 basis points when it meets June 12-13. While the Fed’s Summary of Economic Projections still calls for a total of three hikes this year, many experts consider a fourth hike likely.
The correlating rise in Treasuries has bumped up municipal rates with the 10-year at 2.55% this week compared to 2.44% at the start of March and 1.98% at the start of the year, according to MMD data.
“That’s why we are now looking at possibly doing O’Hare before the end of the year, because we have to so much O’Hare debt to do that every 25 basis points is a real cost,” Brown said.
The Chicago Board of Education last week upsized its refunding deal to $561 million from $260 million because a return to market later in the year to complete planned refundings could translate into reduced savings.
Chicago’s upcoming sales include $750 million to $800 million through the Sales Tax Securitization Corp. established last year to leverage city sales tax revenue to refund outstanding debt; $500 million of new money and refunding water revenue bonds; and $400 million of new money wastewater bonds.
The securitization bonds will likely sell in September or October “so we pick up the next current calls,” Brown said. “We are starting to work on the first O’Hare deal,” recently meeting with lead manager JPMorgan. “We don’t have a size yet," she said. "We are thinking that will come some time before the end of the year.”
The water and wastewater ordinances were introduced to the City Council at its meeting Wednesday. The securitization and O’Hare financings are already authorized by the council. The council on Wednesday also signed off on an $800 million inducement ordinance that preserves the city’s ability to issue tax-exempt debt in the future to cover various projects now in the works.
No specific credit is noted in the technical ordinance and Brown said the city still has no plans to borrow under its general obligation credit – which carries weaker ratings than its revenue-backed programs – until late 2019 or 2020.
The securitization bonds carry two triple-A ratings but pay yield penalties for the city’s weak GO credit. The city’s GOs range from a low of junk Ba1 from Moody’s Investors Service to the single-A category from Kroll Bond Rating Agency, with Fitch Ratings and S&P Global Ratings in the triple-B category.
The securitization issue would mark the city’s third under the program designed to trim interest cost by refunding up to $3 billion of city sales tax revenue bonds and GOs.
The city had planned a nearly $900 million tax-exempt sale in January – a follow-up to the $744 million debut last December – but held the deal citing a tougher “market tone” following federal tax reform and rising rates. It returned the following week with $376 million of tax-exempts and $304 million of taxables.
The city’s 2018 budget relies on about $90 million of savings tied to the refunding of existing bonds using the securitization corporation’s bankruptcy-remote structure. The paper carries a AA rating from S&P Global Ratings and AAA ratings from Fitch Ratings and Kroll Bond Rating Agency. All assign a stable outlook.
The city’s sales for O'Hare have fared well with the market demanding little penalty in recognition of the separation of airport revenues from the city’s corporate funds. Moody’s and S&P and Fitch rate O’Hare general airport revenue bonds at A2 and A, respectively, and Kroll assigns an A-plus rating. The city has about $7 billion of O’Hare debt outstanding.
While rating agencies have praised the terminal plans, it unclear whether the city’s ratings will hold firm given the ballooning debt load. Fitch has also warned in previous reports that a recent court ruling that’s under appeal in Puerto Rico's Title III bankruptcy could pose a threat to special revenue credits rated above a municipality's issuer default rating, which Fitch has at BBB-minus.
The city’s water and wastewater enterprise systems carry a range of ratings: from the triple-B category from Moody’s to the single A category from S&P and the double-A category from Fitch and Kroll. The city no longer asks for Moody’s ratings on upcoming deals.
The city is also still trying to hash out new rules for banks it does bond and other business with on gun control polices. Officials are working with the banking association and others “to craft an ordinance that is effective but that also doesn’t hamper our ability to access the market,” Brown said. “We are still working on it.”
The city last month put the brakes on a proposed ordinance that would ban doing bond deals with financial institutions that don’t agree to impose certain gun control policies on their retail business clients. Industry officials warned as written it was too broad to enforce and would likely prompt some banks to simply forgo city work.