CHICAGO -Scant supply and double-A level ratings should help offset investor penalties imposed on the Chicago name when the Chicago Transit Authority sells $555 million of sales tax bonds Wednesday, several market participants said.
The CTA is promoting its "strong credit profile" supported by strong pledged revenue collections and bondholder security and solid fiscal operations despite struggles to meet its capital needs.
"Sales tax revenues are a high-quality revenue stream" that benefit from a "long history of stable receipts," the CTA tells investors in a "roadshow" presentation. "Collections exceeded CTA budgeted projections last year by 2%."
Loop Capital Markets LLC is the senior manager with Barclays, Morgan Stanley, and William Blair & Co. as co-seniors. Mayer Brown LLP and Greene and Letts are bond counsel. Public Financial Management Inc. and A.C. Advisory Inc. are advisors.
The sale includes a mix of serial and term maturities with principal on the new bonds only beginning to amortize in 2040. The bonds have a final maturity of 2049.
The sale is secured by a pledge and lien on sales tax receipts distributed by the CTA's fiscal parent, the Regional Transportation Authority of Illinois. In addition to the CTA's share of sales taxes, the receipts include discretionary payments made by the RTA and public transportation fund revenues paid by the state.
The CTA's overall public aid from sales tax collections and other sources totaled nearly $700 million. The CTA's share of city real estate transfer taxes are only pledged to its 2008 retirement-related sales tax backed issue, but growth in those funds frees room to additionally leverage the sales tax.
Ahead of the sale, the CTA sought ratings from Standard & Poor's, which has previously rated its sales tax bonds, but dropped Moody's Investors Service in favor of Kroll Bond Rating Agency. Both assigned AA ratings and stable outlooks to the credit.
"Everything with a Chicago name, with a few exceptions, will see a penalty," said Stephen Winterstein, chief strategist for municipal fixed income at Wilmington Trust Investment Advisors, Inc. "The dearth of supply and investor appetite voracious" should help cut the penalty with strong demand for "for good investment grade paper."
Proceeds will fund projects in the CTA's $3 billion capital program that runs through 2018. It funds the purchase of more than 800 new rail cars, a major track and station overhaul of a key train line, the purchase of 300 new buses and rehabilitation of another 1,000, as well as other track and station improvements. The CTA is also upgrading its line to O'Hare International Airport to reduce travel times.
The program relies on the additional borrowing of $1 billion through 2018, including $215 million next year. It relies on funds from a mix of sources including an $80 million loan under the federal government's Transportation Infrastructure and Innovation Act for a terminal project that carries a $240 million price tag. "CTA continues to explore additional TIFIA loans," according to the roadshow.
The RTA and its service boards have been strapped for infrastructure funding and have tussled over the CTA's independence as a borrowing agency. The RTA has traditionally served as the main borrower for its service boards but its statutory authority is limited.
Big changes could occur for both agencies if lawmakers adopt the recommendations unveiled earlier this spring by a state task force to scrap the current oversight structure. It proposed that the region's transit be governed by a new, single super agency with an eye on more funding support. The proposals have not made much headway at the General Assembly.
The CTA in its investor roadshow promoted its fiscal strides in recent years. The agency has halted the use of capital funds for operations and eliminated its structural budget imbalance. The 2014 budget relies on conservative revenue growth, no fare increases or service cuts, and expected improvements from its capital investments.
The CTA also highlighted that its pension fund and retiree healthcare liabilities were the subject of 2008 legislation that puts the pension fund on the path to a 90% funding ratio by 2059. The pension challenges of Chicago and several of its sister agencies have driven rating downgrades.
Kroll said the credit is strengthened by debt service coverage of 2.55 times of pledged revenues, the availability of surplus pledged revenues to cover 51 % of operating expenses, annual growth in pledged revenues of 9% since 2009, and the essential nature of the CTA's service to the region.
Kroll said rating concerns include a prior lien on RTA debt obligations of the CTA's pledged revenues, that a statutory intercept for unpaid CTA pension contributions could reduce debt service coverage, and that about 28% of pledged sales tax receipts come from RTA discretionary funds.
The state's chronic payment delays have resulted in late payments of public transportation fund matching funds impacting cash flow, Kroll said.
"The stable rating outlook reflects our opinion that the large and diverse tax base supporting CTA's bonds will likely continue to provide what we consider good coverage from sales tax revenue," wrote Standard & Poor's credit analyst John Kenward.
Moody's Investors Service last fall downgraded the CTA sales tax bonds to A1 from Aa3 and assigned a negative outlook, a move triggered by escalating capital needs and what analysts believe is an unfavorable political landscape to raise revenues due to city and state fiscal struggles.
