CHICAGO – Chicago may tweak the timing of some bond deals it had planned this year and is eyeing its first general obligation deal since early 2017.
That 2017 sale provided proceeds to cover near-term capital needs and the city has used a commercial paper line to cover interim needs, so officials did not anticipate the need to return until 2019.
That gave Mayor Rahm Emanuel’s financial team time to make gains on city balance sheet measures and pension funding that would translate into improved sentiments about the city’s prospects.
“It is likely there will be a need to fund some capital” next year, chief financial officer Carole Brown said in an interview Wednesday with reporters after Emanuel unveiled the city’s $10.7 billion 2019 budget proposal.
Whether it would happen before a new mayor takes office in May is uncertain. Emanuel announced last month he won’t seek re-election and more than a dozen candidates have declared their candidacies with several others eyeing bids.
On the administration’s current to-do list “is to sit down and talk about capital planning and funding and so that decision hasn’t been made,” on whether to return to the market with a GO before May, Brown said.
Brown said the city could move forward with a deal or continue to tap its commercial paper line as it has the capacity and let the next administration decide on its own course.
“If we decide to do GOs it’s going to require some market discussion and education” due to the city’s absence since early 2017, Brown added. “I think they will be receptive,” she said of the buyside.
The city carries ratings of BBB-minus from Fitch Ratings, A from Kroll Bond Rating Agency, Ba1 from Moody’s Investors Service, and BBB-plus from S&P Global Ratings. All assign a stable outlook.
The city has shunned Moody’s in recent years, does not communicate directly with analysts there, and lists only the other three on its investor site but the junk status is reflected in city trading spreads.
Chicago spreads are holding steady under 200 basis points to the Municipal Market Data's top-rated benchmark, but GO paper has traded only thinly in block sizes among institutional buyers this month, said Daniel Berger, senior market strategist at Municipal Market Data.
Market sources said that could signal that buyers may be struggling with the valuation on a Chicago GO and some could waiting to see where spreads land on an upcoming Chicago securitization deal.
IHS Markit’s Ed Lee said he saw some recent trades that showed a weaker tone. A 2026 maturity traded lower by nine basis point for a spread at 191 bp and a 2038 traded lower by 11 bp for a spread at 152 bp.
Spreads have hovered around 160 bp in recent months, but also ranged from lows of 130 bp to highs closer to 200 bp. Spreads were around 230 basis points a year ago.
The city’s spread penalties in secondary trading have hovered between 150 basis points to 170 bp, a vast improvement from its last primary outing when spreads hit a city peak in January 2017, landing at 339 to 347 bp over the Municipal Market Data's AAA benchmark. The penalty reflected no only the city’s fiscal strains but also Chicago Public Schools’ liquidity crisis and market concerns about then-looming changes and tax-exemption threats under the new Trump administration.
Since the sale, the city has set in state statute overhauls covering two of its four pension funds. The other funds were the subject of previously approved legislation.
The city has trimmed its structural deficit during Emanuel’s tenure and established a new securitization bonding program to refund $3 billion of sales tax and GO debt. It has eliminated scoop-and-toss debt structuring and the state raised aid and approved additional pension levies for Chicago Public Schools that have materially eased its fiscal strains.
Earlier this year, Moody’s shifted its outlook to stable from negative and Kroll raised the city’s rating two notches. Investors at the city’s August buyside conference voiced a more favorable view of the city’s prospects than in past years.
Emanuel’s announcement that he won’t seek a third term in the 2019 municipal election has raised concerns about whether a future mayor will further stabilize city finances or reserve course, so the impact on a GO sale remains untested.
The city has a series of deals under its better-rated securitization and enterprise system credits still slated for this year but Brown said she’s watching the market closely and may tweak timing. Rising rates, daily fluctuations, and lots of supply are influencing the municipal market.
The city’s next sale is a $665 million sale through its Sales Tax Securitization Corp. to refund GOs for savings.
Its scheduled for Oct. 31, but “the market is kind of choppy” so the city is looking at whether to hold off, Brown said, adding that no decision has been made as further discussions are held with the underwriting team. If pushed off, Brown said she still expects to bring it before the end of the year.
Stifel Nicolaus & Co. Inc. and Loop Capital Markets are joint bookrunners. A fourth tranche for about $650 million is expected next year. The city sold $680 million earlier this year and its inaugural borrowing was late last year for $744 million. The securitization bonds carry triple-A ratings from Fitch and Kroll and S&P's AA.
The city is also still expects to come to market this year with its first borrowing under an initial $4 billion bond authorization approved by the City Council earlier this year to help finance an $8.5 billion terminal makeover at O’Hare International Airport. Brown has previously said the deal could range between $1 billion and $2 billion depending on the timing of work. JPMorgan has the books. The O’Hare general airport revenue bonds carry single-A ratings.
Wastewater and water revenue deals were also slated for this year but may be pushed over to next year. We may just “run out of time,” Brown said.
The council has authorized $500 million of new money and refunding water bonds and $400 million of new money wastewater bonds. Mesirow Financial Inc. and The Williams Capital Group are senior manager on both deals.
The city’s water and wastewater enterprise systems carry a range of ratings: from the triple-B category from Moody’s to the single A category from S&P and the double-A category from Fitch and Kroll.
The fate of a possible $10 billion pension obligation sale under consideration remains uncertain although its prospects dim as Treasuries rise and cut into value of borrowing at a lower rate than expected investment returns.
