CHICAGO – Thursday's pricings of an Illinois general obligation sale and a Chicago airport revenue bond deal highlighted the market's divergent sentiments about the deals' security features.
Illinois saw spreads on the 10-year of its competitively issued $480 million new-money deal land at a 200 basis point spread to the Municipal Market Data's benchmark. That's up from 193 basis points on its October GO pricing and 185 basis points in June. Overall spreads fared slightly better on the short end compared to the negotiated October pricing but were on par on the longer end.
Chicago sold $1 billion of O'Hare International Airport general airport revenue bonds with improved compared to its sale in October 2015 and little penalty especially when compared to what's imposed on the city's GO paper. A 10-year maturity in one series of the deal landed at a 58 basis point spread to the AAA, which reflected a nine-basis-point tightening as the bonds were repriced.
"This is how the market feels about these individual credits and I think it's about the trajectory of each name," said Brian Battle, director of trading at Performance Trust Capital Partners.
Bank of America Merrill Lynch won the bidding on the $480 million Illinois GO sale with a true interest cost of 4.2449%. The firm has also won recent state competitive deals and was lead manager along with Jefferies on the state's $1.3 billion GO refunding last month. The state received eight bids for the GOs; other bidders were RBC Capital Markets, Goldman, Sachs & Co., Citi, Jefferies LLC., Barclays Capital, JP Morgan, and Morgan Stanley.
“The state is pleased with today's bond sale, which met our expectations given the current status of the market,” Gov. Bruce Rauner’s spokeswoman Catherine Kelly said in statement.
The triple-B rated issue's 10-year maturity that offered a 5% coupon landed at 3.70%, 200 basis points over the MMD benchmark rate of 1.70% and 116 basis points over the 2.54% BBB benchmark. The long bond maturing in 2041 that offered a 5% coupon landed at 4.48%, also 200 basis points over the AAA rate of 2.48% on comparable maturities and 116 basis points over the 3.32% BBB.
The 10-year maturity in the state's $1.3 billion GO refunding sale last month yielded 3.63%, 193 basis points more than the MMD AAA and 112 basis points over a comparable triple-B benchmark credit.
The spreads deteriorated from the state's sales earlier this year. The 10-year on a June sale landed at 3.32%, 185 basis points over the triple-A and 111 basis points over the BBB. The 10-year maturity in the state's January sale saw a yield of 3.33%, a 155 basis point spread to the triple-A.
Illinois is the lowest rated state and faces further rating erosion if lawmakers and Gov. Bruce Rauner don't resolve the differences that have stalled passage of fiscal 2016 and 2017 budgets. State lawmakers are facing a $5 billion deficit, a $9 billion bill backlog, and $113 billion unfunded pension burden when they return to work in the coming months.
Chicago's sale of $1.02 billion of A-rated O'Hare airport senior lien revenue refunding bonds went down more smoothly than either the state GOs or the city's past GO paper.
The 10-year on a $463 million series of bonds not subject to the alternative minimum tax offered a coupon of 5% and yield of 2.28%, 58 basis points over the AAA and just 6 basis points over the single-A benchmark. BAML ran the books.
A 2041 maturity was priced to yield 3.23% with a 5% coupon, 75 basis points over the AAA and 18 basis points over the single A.
The city erased much of the penalty imposed on its last O'Hare sale – for $2 billion – in October 2015. The spread to MMD triple-A was 124 basis points on the 25-year bond 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.
The city pays steep penalties on its GOs for pension woes that have dragged one of its ratings down to junk with deals pricing and bonds trading at spread of between 200 and 300 basis points to the MMD AAA depending on the city's fiscal news. They've narrow in recent months.
While penalties are also imposed on city revenue credits due to the connection, the O'Hare deal priced close to comparable credits. The sale benefitted on two fronts – the airport's own strengths and improved market perception of the city's finances, Battle said.
Despite concerns that the city's pension funding revisions are flawed and don't go far enough, the market has credited Mayor Rahm Emanuel with pushing through tax increases to bolster funding.
The O'Hare bonds also offered investors hungry for yield some extra spread kick yet limited exposure to the city's budget strains due to its status as an enterprise system.
"People know what's going on at O'Hare and what's going on with the city," Battle said. "What's going on at the state is an unknown. There's not plan to deal with the big pension liability and lawmakers have gone home until after the election. Illinois is getting penalized for uncertainty."
The city will follow up the sale with $1.2 billion of new money O'Hare general airport revenue bonds late this month or early next month. Morgan Stanley will run the books on the new money.
