Yield-hungry market leads Chicago to extra savings
Chicago’s $1.5 billion sale of general obligation refunding bonds and Sales Tax Securitization Corp. debt generated $310 million of savings for budget relief this year and next, city officials said.
The deals that priced Wednesday and Thursday marked the first bond issues by Mayor Lori Lightfoot’s administration. Lightfoot’s $11.65 billion 2020 budget relies on $210 million of refinancing savings to close an $838 million gap. The budget balancing plan relied on 60% structural fixes and 40% of non-recurring measures.
The city’s inclusion of a tender invitation to holders of up to $1.8 billion of high-interest-rate taxable bonds helped bolster the savings as did a flood of orders for the city’s higher yielding paper that resulted in a healthy cut to its yield penalties.
The $370 million of tendered bonds generated $40 million in savings. In addition to the $210 million of savings for the 2020 budget, the city will use $100 million of refunding savings next year providing a cushion as it works toward structural balance. Capitalized interest also helped bolster upfront savings. The city did not immediately say how much savings would be seen further out in the repayment schedule.
“Savings from the transactions, which are dedicated to fiscal 2020 and fiscal 2021 budget balancing, will strengthen the city’s long-term fiscal health,” Chicago’s chief financial officer Jennie Huang Bennett said in a statement Friday.
The administration acknowledges the one-time nature of the refinancing savings but says it provides needed breathing room to work toward structurally balancing the budget by 2022. The city’s plans rely on $100 million of new annual revenue from changes to the tax on property sales and $200 million from the eventual operation of a Chicago casino. Both require state legislative action this year.
A flood of orders for both the GO and STSC deals led to re-pricing scales that resulted in the tightest spreads seen by the city in a decade on a GO, Chicago officials said. It also allowed the new second lien to fare better than the city’s senior lien did in the most recent sale.
Debt service in the new schedule is lower in every year than the refunded debt, the city said.
The city saw its spread on the 10-year maturity in the deal shrink to 105 basis points over the Municipal Market Data’s AAA benchmark from a 169 bp spread on its 2019 issue under then Mayor Rahm Emanuel.
On the tax-exempt second lien STSC bonds, the 10-year landed at a 60 bp spread to the AAA. The 10-year in the last tax-exempt STSC senior lien issue that sold in late 2018 settled at an 83 basis point spread to the AAA.
On the taxable STSC series, an 11-year bond landed at a 105 spread to comparable Treasurys. The 15-year, the longest bond without insurance, landed at a 130 bp spread. The city’s last taxable deal in 2019 only offered term bonds in 2040 and 2048 and they landed at spreads of 156 bps and 171 bps, respectively.
Both the GOs and STSC saw tighter spreads than they had in recent secondary trading. Build America Mutual Insurance Co. wrapped several maturities in the GO and STSC bonds.
Market participants give primary credit to the state of the market, noting that high yielding big-name issuers have all benefited from the market’s flush of cash available for investment.
“The municipal market has been on a tear and Chicago is benefiting from a demand imbalance,” said Brian Battle, director of trading at Chicago-based Performance Trust Capital Partners. “It doesn’t portend that things are getting better and it’s not an endorsement” that Chicago finances have improved.
The demand also reflects the securitization features that are stronger than typical revenue bonds that have taken a reputational hit due to Puerto Rico bankruptcy rulings.
Other factors that helped the city include Chicago’s near-term stability and investor willingness to give the city time to move towards structural balance. “The rating agencies have generously given the city short-term stability so the market reaction to this deal reflects investor patience,” Battle said.
The side-by-side sale of the two credits provides insight into the market’s perception of the value of the double-A to triple-A rated STSC and the link to the city’s overall credit that’s rated between a low of junk to a high of single A with two ratings in the BBB category.
The GO spread penalty still remains more than 40 basis points wide to the BBB benchmark and the double-A to AAA-rated STSC second lien priced more in line with the BBB benchmark.
Triple-B spreads for a double-A- and triple-A-rated credit highlight the fact that the corporation is linked to a fiscally strained government and the soundness of the security features haven’t been tested in bankruptcy court, Battle said.
The city had intended to sell a C series of $220 million forward delivery bonds under the STSC credit next month as part of the up to $1.5 billion City Council authorization for the deal, but will now sell that later in the year. The city expects additional savings to be added to the overall deal once sold. The city will require additional council authorization.