Chicago and Illinois poured more than $1 billion of their high-yielding, low-investment-grade rated general obligation paper into the market on the same day and a cash-flush buyside scooped it up.
Both issuers could claim headway despite paying costly yield penalties to borrow, with spreads wide to the BBB benchmark.
In the city’s case, spreads narrowed by 150 to 175 basis points from its last GO issue in early 2017, while the state’s spreads came in narrower compared to recent trading activity.
The side-by-side timing in another market atmosphere could have proved problematic, market participants said, but the two issuers benefited from a market buoyed by the Federal Reserve’s plans to hold interest rates steady this year and lots of available investment cash with higher yields tough to come by.
The market’s perception that the two credits are stable for now despite deep budgetary and pension strains and in the city’s case a looming mayoral change also helped as did the differing structures of each deal.
“Market technicals have been extremely powerful this quarter, driven both by strong fund inflows as well as a perceived slowdown in the US economy, so the timing for both the state and the city issues was quite favorable,” said Triet Nguyen, managing partner at Axios Advisors LLC.
“The relatively strong market reception was also due to the fact that both entities are in a state of political transition and are enjoying a honeymoon period of sorts with investors as well as with the rating agencies,” he said.
“It’s hard not to worry about Chicago and Illinois but both bonds did well. I don’t know that it’s a function of the market approving of either the city or the state as much as the market is so hungry for bonds,” said Matt Fabian, partner at Municipal Market Analytics. “But the state and city also haven’t done anything to make it harder for the market to guy their bonds” in the near-term.
Former Gov. Bruce Rauner's November ouster by J.B. Pritzker is a positive long-term result for the city and in its mayor's race, “neither of the two candidates have come out and said negative things about bondholders,” Fabian said.
“The market is also feeling more comfortable with Illinois” as Pritzker “has rolled out a plan; it’s not bullet proof or necessarily achievable but market is usually willing to give a new executive the benefit of doubt” for a period of time,” Fabian added.
Illinois took competitive bids on $300 million of taxable bonds that carried a final 2044 year maturity and $140 million of tax-exempt refunding bonds with a final nine-year maturity. Bank of America Merrill Lynch won both tranches, the first with a true interest cost bid of 5.74% and the second with a TIC of 3.33%.
Chicago headed into the week with plans to price its $722 million, tax-exempt 30 year bonds in a negotiated sale led by Barclays on Wednesday but jumped in Tuesday as the team was “getting good reads from accounts,” said one source. The final pricing resulted in a TIC of 4.74%.
The sales provided a rare side-by-side comparison although direct comparisons are difficult given the varying maturities of each deal and the fact the state came competitively and the city negotiated.
Illinois’ tax-exempt piece goes out only nine years while Chicago’s tax-exempts mature from 2027 to 2049 so the only direct comparisons can be made on the 2027 and 2028 maturity in each deal.
The state saw a spread of a 175 basis points to the Municipal Market Data AAA benchmark on maturities while the city saw a 170 bp spread, according to Greg Saulnier, municipal bond analyst at Refinitiv.
“Today the city’s 10-year general obligation bonds are trading five basis points lower in yield than the higher-rated state of Illinois that was also in the market today with general obligation bonds,” a city statement said.
The nine-year in each deal saw spreads of more than 90 basis points above the BBB benchmark underscoring the steep penalties imposed on both.
Fitch Ratings rates Chicago BBB-minus and stable and Illinois BBB and negative. S&P Global Ratings rates Chicago at BBB-plus and stable and Illinois at BBB-minus and stable.
Kroll Bond Rating Agency rates the city A and stable and does not rate the state. Moody’s Investors Service rates the state Baa3 and stable. It was not asked to rate the city bonds but it assigns the city the junk rating of Ba1 and stable on previously rated GOs.
“The spreads still reflect significant concerns over the fiscal outlook for both entities, with Illinois still trading at what we would consider below investment grade level for a sovereign GO,” Nguyen said. “Investors are giving the city more credit for improvements on the operating side under the Rahm Administration.”
The Chicago deal attracted more than $4 billion in orders from more than 75 investors.
“The city accelerated the sale of the bonds to take advantage of investor demand, resulting in yields ranging from 3.45% to 4.40%,” its statement said. “Spreads on the bonds priced today are between 150 and 175 basis points lower than the city’s most recent general obligation bond transaction that sold in 2017, reflecting the markets recognition of the city’s fiscal progress.”
The city’s spreads landed at 170 basis points to the AAA on the first three maturities in 2027, 2028 and 2029 and then 168 bps in 2031, 165 bps in 2035, 178 bps in 2039, 178 bps in 2040, 180 bps on a 2044 maturity and 170 bps on the final 2049 maturity which offered a 5.50% coupon while the other maturities all offered a 5% coupon, according to Refinitiv.
The city’s primary spreads peaked with its last GO sale in 2017. A 2029 serial bond paid a yield of 5.8%, 331 bps over MMD AAA.
For Illinois, the refunding tax-exempt tranche achieved 7% net present value savings.
The taxable tranche received nine bids with the cover bid coming from Wells Fargo Securities. The tax-exempts received 14 bids with the cover bid coming from Goldman Sachs. “Both cover bids were very close to the winning bidder,” the state said.
“We are very pleased with the strong response that the State received on today’s competitive bids and believe that recent positive statements by the Federal Reserve Board Chair and corresponding improvements in both the U.S. Treasury and tax-exempt municipal bond markets made this an opportune time for the state to come to market,” capital markets director Kelly Hutchinson said in a statement.
The tax-exempts mature between 2020 and 2028 with spreads landing at 100 bps, 107 bps, 123 bps, 145 bps, 155 bps, 160 bps, 170 bps, 175 bps, and 175 bps, according to Refinitiv. Those same maturities had been previously trading at spreads of 100, 130, 145, 171, 177, 180, 182, 183, and 183. The 10-year in the state’s GO sale last year landed at a 175 basis point spread to the AAA.
