CHICAGO -- Cook County, Ill. is coming to market Thursday with $130 million of refunding bonds, marking the largest general obligation bond offering from an Illinois issuer so far this year.
The county expects roughly $10 million -- or 7% to 8% -- of net present value savings over the eight-year life of the debt with the refunding. With no new-money deals on the table, Thursday's sale is likely the county's only significant, fixed-rate deal of the year.
"We are definitely seeing the signs of a fair amount of interest from investors," said the county's chief financial officer, Ivan Samstein. "We're in an attractive portion of the yield curve for investors in a rising interest-rate environment. It feels like a good week to be in the market."
In conversations with investors and on a net-road show attached to preliminary bond documents, the finance team and county officials are promoting the credit's recent budget stability, improved financial and disclosure practices, and the positive impact of the new federal health care law.
All three major ratings firms affirmed the county's credit ahead of the deal. Moody's Investors Service rates Cook County A1 and Fitch Ratings has an AA-minus rating. Standard & Poor's rates it AA.
Both Fitch and Moody's maintain a negative outlook on the county, chiefly due to its unfunded pension obligations. It's a problem that county President Toni Preckwinkle is working on, Samstein said.
"Senate Bill 1 had limited impact on local pension funds," he said, referring to the high-profile state government pension reform legislation passed by lawmakers last December. "But as it relates to Cook County, the president is still aggressively pursuing reform; we believe it's critical in the long run."
Though the state reforms do not extend to local pension funds, the county may still see a boost in investor interest.
Spreads for other prominent Illinois credits, like Chicago and the Chicago Board of Education, have tightened over the last month, which many muni market observers attribute to the new law.
"This is the first significant issue of size from an issuer in the state of Illinois in 2014, so there's limited primary market supply to look at," Samstein said. "But in the secondary market, the trades on major issuers in Illinois, we've seen credit spread improvement."
The county, like all local Illinois governments, cannot make significant changes to its retirement fund without legislative approval. But it hopes to hammer out its own reform plan with unions and bring it to the General Assembly.
The Chicago Park District has already successfully lobbied lawmakers to pass reforms tailored to its local retirement plan.
Cook's retirement fund has $7.8 billion of assets with a $13.4 billion liability, translating into a funded ratio of 58% as of Dec. 31, 2012, according to preliminary bond documents. Without changes, the fund will be depleted of assets by 2034, officials said.
Like other rating agencies, Fitch warned that the county's pension obligations pose a major challenge.
"Fitch believes the county is making significant progress towards meaningful pension reform," analysts said in the ratings report on this week's deal. "Management's inability to implement an affordable plan in the near term to shore up long-term pension funding will likely lead to a downgrade."
Officials also tout the administration's focus on creating a more self-sufficient health care system. Cook's public health care system -- one of the largest in the country -- accounts for nearly a third of its annual budget, with costs of around $1 billion.
The county's subsidies to offset the system's chronic shortfalls have fallen steadily over the years: from $452 million in 2008 to $175 million in 2014. The subsidy is expected to hover around $175 million for the next few years, Samstein said. The new federal health care law will help ease the county's pressure due to higher revenues for the county through an expanded Medicaid program.
The county is not taking any debt-service savings in 2014 or 2015 as part of a long-term budget planning process, Samstein said. "We wanted the savings to be part of our medium-term plans," he said. "We're trying to focus on our multi-year fiscal forecast and our long-term financial goals."
Loop Capital Markets is the senior manager and BMO is co-senior. Barclays, George K. Baum & Company, PNC Capital Markets LLC, Robert W. Baird & C., and Wells Fargo Securities round out the team.
Chapman and Cutler LLP and Charity & Associates, PC are co-bond counsel. A.C. Advisory, Inc. and, for the first time, Columbia Capital Management Inc. are co-financial advisors.
