CHICAGO – Investors squeezed a more modest penalty out of Chicago on a recent $419 million wastewater revenue bond deal than they have demanded on its general obligation paper, market participants said.
The wastewater deal was Chicago’s second in two weeks in which it offered revenue-backed bonds that fared dramatically better than its GOs.
“The market is differentiating the city from its enterprise systems and there is high confidence that the enterprise systems will pay,” said Brian Battle, director of trading at Performance Trust Capital Partners. “Professionals understand the differences.”
Several traders and other buyside representatives echoed Battle’s opinion. One added that the enterprise debt is appealing in that still offers an extra yield kick but with less risk.
The 10-year maturity on the $332 million refunding tranche of the wastewater deal paid a yield of 3.46%. That’s 145 basis points over the Municipal Market Data’s top-rated benchmark.
Trading on the city’s GOs has hovered around 250 basis points over MMD.
GO spreads are down by about 50 basis points since Chicago Mayor Rahm Emanuel last month unveiled a big property tax hike to begin tackling the city’s public safety pension burden. The city will as soon as November sell up to $500 million of refunding and structuring GOs.
The wastewater bonds carried mixed ratings with a low of A and a high of AA and benefitted from an upgrade. Moody’s Investor Service, which was not asked to rate the issue, assigns triple-B ratings to the wastewater credit. The city’s GOs range from Moody’s junk-level Baa1 to a high of A-minus from Kroll with the other two agencies at BBB-plus.
The 10-year wastewater tax-exempts came at a 48 basis point spread to MMD’s triple-B scale; 90 points over single-A; and 125 basis points above MMD’s double-A scale.
The prices drew strong interest from buyers who placed than $2 billion in orders on the $332 million tranche. The maturities between 2017 and 2039 were six to 15 times oversubscribed and saw yield reductions of 10 to 13 basis points, market participants said.
On the taxable $87 million tranche, the nine-year maturity yielded of 4.83%, 285 basis points over comparable Treasuries. Ramirez & Co. Inc. was lead senior manager. The city’s taxable GO sale earlier this year paid nearly 500 basis points over Treasuries.
A week before the wastewater transaction Chicago sold $2 billion of O’Hare International general airport revenue bonds. The deal, mostly for refunding, was Chicago’s largest issue ever. The deal also benefitted from an upgrade and carried ratings ranging from the A-minus to the A-plus level.
The city said the deal was 5.4 times oversubscribed, drawing 220 buyers. The deal was bolstered by interest from 160 new investors in O’Hare debt and the refunding achieved better than expected present value savings of 12.6%.
The top yield on a piece not subject to the alternative minimum tax landed at 4.24 percent on a 2040 term bond. The spread to MMD triple-A was 124 basis points with spreads on shorter maturities in the 90 basis point range. The spread to a single-A credit on the 2040 bond was 62 basis points. JPMorgan and Loop Capital Markets LLC were co-bookrunning senior managers.
Market participants said the airport paper paid a natural penalty for the Chicago name, its size, and the state’s woes, but described the pricing as “fair” and interest in the improving credit exceptionally strong. Battle said it’s difficult to compare the O’Hare results to the wastewater given the dramatically different size and structures.
Yields on O’Hare paper secondary have narrowed since its last sale two years ago reflecting in part the overall improved appeal of the sector which helped the transaction, market participants said.
Both the wastewater bonds and O’Hare debt are backed by enterprise system revenues with the airport enjoying stronger segregation from city finances as the use of revenues there are limited by federal rules.
On the wastewater credit, Fitch wrote in its recent report that while it views the potential for spillover of financial pressures to the city's utility funds as unlikely “severe liquidity stress within the non-enterprise funds (including the general fund) would likely pose the greatest threat to the utility.” The city has some flexibility to divert system resources.
The wastewater deal converted floating-rate paper to fixed to shed bank support and covered the cost of cancelling an associated interest rate swap, part of the city’s effort to deal with a potential $2.2 billion liquidity crisis as its credit deterioration triggered defaults and termination events on bank contracts.
