Chicago- and Illinois-based retail investors and funds pursuing environmental, social, and governance goals scooped up the city's inaugural social bond deal last week, Chief Financial officer Jennie Huang Bennett said.
The $740.5 million sale Thursday under the city's Sales Tax Securitization Corp., a special purpose entity that carries double-A to triple-A ratings, offered $156 million of new money senior lien tax-exempt and taxable bonds with a "social" bond designation.
Another $555 million of mostly second-lien tax-exempt and taxables refunded general obligation bonds following a city tender offer.
The city saw a 21% participation level in its offer to
Across the deal, 30 new investors participated in the transaction, the city said, including some high-grade funds like insurers and corporate cash investors who had shunned most Chicago debt after Moody's Investor's Service it to junk in 2015.Buyers submitted $2.1 billion in orders.
The city attributed the healthy demand to a combination of factor from the social-designed bonds, retail participation, and a ratings upswing led by Moody's
The return of mutual fund inflows over the last two weeks also lent a hand by boosting demand.
The social bond piece of the deal drew healthy interest on two fronts:
"The city of Chicago saw a pricing improvement on its social bonds verses non-social bonds," Bennett said in an interview Monday, attributing it to the level of interest from Chicagoans, the broader retail market, and ESG funds.
"That's how you get to lower pricing," she said. "Through extra demand."
Bennett said the city saw a three-to five-basis-point distinction in the social bonds compared to the non-social bonds in the deal under the same lien.
The city received $217 million in retail orders with $165 million drawn to the $156 million of social bonds and $52 million on the remainder of the transaction, said deputy CFO Jack Brofman.
The deal also attracted interest from 11 ESG funds.
City-based buyers accounted for 8% or $12 million of the retail orders for the social bonds with another $22 million going to other Illinois-based buyers for a total city and state based participation rate of 24%. The city gave local buyers first crack at the social bonds through priority status followed by state-based buyers and then national retail along with ESG funds.
The retail participation stands out because municipal borrowers in Illinois can't offer in-state tax exemption, meaning local buyers have no financial incentive to favor in-state debt.
Chicago deals over at least the decade have seen no more than at best a 1% retail participation level.
"I think that the level of retail participation that we saw on this transaction has a lot to do with the fact that we were selling social bonds that are attractive to folks to be able to say 'I'm making an impact in my own community. And in the meantime, I'm also generating a return on investment,'" Bennett said.
Retail was defined as orders placed by an "individual, or a bank trust department, money manager, or registered investment advisor, including separately managed accounts, acting on behalf of an individual, with a maximum order of $1MM per account," according to the pricing wires.
After priority retail orders, the city filled $88 million of orders from the 11 ESG funds in the institutional pricing with the remainder of the social bonds going to national retail buyers, a number that Bennett described as healthy based on market feedback.
The city opted to use the higher-rated STSC credit over its GOs to sell its inaugural ESG-labeled bonds to make the deal more attractive to retail.
To drum up local demand, the city conducted a marketing campaign promoting the investment opportunity in advertisements on the radio, public transit, a special website, and social media with Mayor Lori Lightfoot promoting the investment.
The city also set up a selling group beyond the underwriting syndicate made up of about 40 members of the city's qualified pool of broker-dealers and established a partnership with Fidelity that provided an avenue for "mom and pop" buyers to set up accounts to purchase the social bonds.
"We really tried to meet people where they were," Brofman said.
The
They include electrifying the city's light-duty vehicle fleet, an array of affordable housing investments, and the city's largest tree canopy expansion and vacant lot reduction in its history with benefits that include reduced pollution and crime with special attention on less-affluent neighborhoods.
"Overwhelmingly what they said to us is that they wanted to see a curated set of projects which could allow them to demonstrate impacts to investors, to their bondholders and portfolio holders," Bennett said of recent discussions with ESG buyers.
Kestrel Verifiers provides in the offering statement the independent opinion that the bonds meet the criteria laid out by the International Capital Market Association's social bond principles.
The city also expanded its ESG disclosure in the offering statement to provide more statistics, data and other information like details on its climate action plan that goes beyond what might be considered as directly having a nexus to credit.
"I think there is an opportunity for the city to continue issuing social bonds in particular for the remainder of the Chicago Recovery Plan," Bennett said. The plan relies on $660 million of city bonding, including the $156 million that sold last week.
The city headed into a stronger market that was benefiting from a second week of mutual fund inflows, with Refinitiv Lipper reporting $1.51 billion of inflows for the week ended last Wednesday following $1.98 billion of inflows the previous week.
The city repriced the bonds after filling retail orders and again due to demand Thursday. The city offered a range of coupons including 3s to broaden the appeal for retail.
The city also offered a shorter seven-year call and due to overall demand did not pay a penalty for the added flexibility the call feature provides the city in the future management of its debt portfolio.
The 10-year in the tax-exempt social bond paid a yield of 2.95% with a 5% coupon for a spread of 74 basis points to the Municipal Market Data's AAA benchmark — five better than a pre-marketing wire — while the long 2044 tax-exempt maturity in the deal landed with a 5% coupon at a yield of 3.86% for a 90 bp spread, four better than the pre-marketing wire. The social bonds sold on the senior lien.
Spreads widened on the tax-exempts from the last STSC deal in December 2021 which offered a more favorable market environment but they narrowed from trading levels over the last few months.
The 10-year STSC bond in the city's December 2021 issue saw a 39 bp spread to the AAA benchmark and was evaluated in November at 111 bps and late last year at 96 bps, according to Refinitiv-MMD data. That deal sold on the STSC second lien.
The taxable 10-year senior lien social bonds landed at a 145 bp spread to Treasuries and the second lien taxable 10-year non-social bond landed at a 155 bp spread, according to CreditSights.
The all-in true interest cost on the deal came in at 4.39%. Bennett estimated the city trimmed 15 bps to 25 bps off its prices due to improved ratings. The deal did not push out any debt service and the tender/refunding savings were used to offset the debt service on the new money bonds, Bennett said.
STSC bonds carry ratings of AAA and AA-plus from Kroll Bond Rating Agency based on the lien, AA and AA-minus from Fitch Ratings, and AA-minus on both liens from S&P Global Ratings.
The bonds are secured by a first lien on the state-collected portion of the city's home rule sales and use taxes and the local share of the statewide sales and use taxes that flow directly from the state to the bond trustee.
The city set up the STSC in 2017 as a bankruptcy-remote special entity to refund GO debt at lower costs. The social bonds mark the first new money sold to provide project funding under the credit.
S&P moved the outlook to positive last fall on the city's GO and STSC credits.
Fitch in October upgraded the STSC senior lien one notch to AA. The second lien was left at AA-minus in the October action that came in tandem with an upgrade of the city's GO rating to BBB from BBB-minus. The GOs and senior lien STSC carry a positive outlook while the junior lien remains stable.
The STSC sale follows the city's $
UBS Financial Services Inc. ran the books with RBC Capital Markets and Siebert William Shank & Co. LLC as co-bookrunners.
Next up for the city is a forward GO refunding roughly sized at $160 million using the STSC credit slated for the week of Feb. 8th and then a new money and refunding water and wastewater transaction that includes a $346 million federal TIFIA loan.
