CHICAGO — Chicago will wrap up borrowing under a $3 billion sales tax securitization authorization Wednesday after doubling the deal to $1.3 billion to allow the city to beat rising interest rates and complete the refunding program before Mayor Rahm Emanuel exits in May.
The structure, which extends final repayment 13 years beyond the general obligation bonds being refunded, is being likened to a watered-down version of the city's former "scoop-and-toss" practices.
The city originally planned a $665 million securitization deal this week with a $650 million tranche expected in 2019. Now it's all coming Wednesday.
“We had identified targeted savings for the entire finance plan and we were able to achieve it," Chicago Chief Financial Officer Carole Brown said in an interview Friday. "Based on the interest we saw and the feedback and what we heard from investors, we saw there was the opportunity to complete the finance plan.”
Emanuel announced in September that he won’t run a third term next year.
“What’s going on in the market did also influence our decision to get it all done right now,” Brown said in a reference to rising interest rates. By tapping the full authorizations, investors will know there’s no reason to hold off for the final tranche, Brown said.
The bonds being sold by the Sales Tax Securitization Corp. carry AAA marks from Fitch Ratings and Kroll Bond Rating Agency and AA-minus from S&P Global Ratings following a downgrade last week due to newly published revised criteria on “priority lien” credits. The city’s GOs are rated from a low of junk Ba1 to a high of A with two ratings in the triple-B category.
The City Council approved the special purpose, bankruptcy-remote borrowing vehicle last year and $3 billion in refunding authorization. The city’s inaugural issue last December was for $744 million to refund sales tax bonds and GOs. It carried a final maturity in 2042. The corporation then sold $680 million that sold earlier this year with a final maturity in 2048.
The securitizations generate net present value savings and smooth debt service to provide $700 million in budget relief over five years. That eased the impact of the administration’s decision to end scoop-and-toss, in which annually the city had used new borrowing to meet some principal payments as they came due.
Critics in the past have raised a series of questions about the securitizations, from the impact of leveraging sales taxes that previously flowed to the city’s corporate fund and the potential negative effect on the value of existing GOs to the uncertainty over whether the bankruptcy-remote structure could withstand an actual challenge. The state lacks a Chapter 9 statute.
This week's deal structure, with $949.6 million maturing in 2053, 10 years beyond the final 2043 maturity on any of the city’s existing GOs, prompted the scoop-and-toss comparisons.
The city is refunding bonds from deals in 2005, 2006, 2007, and 2009 that with maturities from 2021 to 2040, according to a tentative list provided by the city finance team.
“They never mentioned anything to us about going to 35 years, in private or public,” said Alderman Scott Waguespack, who chairs the council’s Progressive Caucus. “If you extended the additional five years you are moving into more uncertainty, and it's definitely a form of scoop-and-toss.”
Brown says the deals have lowered the overall cost of GO debt and put the city “in a better overall place financially.”
DEAL DETAILS
The sale tentatively offers a tax-exempt series for $917.6 million with serial maturities from 2022 to 2038 and term bonds in 2043 for $57 million, 2048 for $72 million, and two in 2053 for $311 million and $250 million. A taxable series for $388.6 million is offered in a 2053 term bond.
This week's original $665 million plan lacked a taxable tranche, but Brown said it was added because some of the GO bonds are not callable until next year.
Loop Capital Markets LLC, Ramirez & Co. Inc. and Stifel Nicolaus & Co. Inc. are the joint bookrunners. Ramirez was added after the city decided Thursday to upsize the deal to finish the program.
The city met with investors in Boston, Chicago and New York to promote the credit that’s supported by both healthy coverage of pledged revenues and legal protections that insulate it should the city’s fiscal foundation collapse.
The sales tax securitization bonds have 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 after a state administrative fee.
Coverage of pledged sales taxes must be four times to permit additional issuance. Revenues rose to $662 million last year from $521 million in 2008 and totaled $508 million through September, up 3.6% from the same period last year.
The state signed off on the securitization legislation crafted for the city in 2017 and in addition to Chicago two smaller local governments have used it.
ARGUMENTS
Brown said during a budget hearing last week the December issue achieved more than $46 million of net present value savings with a true interest cost of 3.35% that was 302 basis points better than its last GO sale in early 2017. The February sale had a TIC of 3.88%, 249 bp under the GO sale.
“Due to the STSC, the city is expected to realize over $700 million in budgetary savings over a five-year period,” Brown said in her remarks.
The budgetary relief, however, doesn’t equate to net present value savings. Instead it includes upfront relief achieved by smoothing out growing debt service demands that eased the impact of Emanuel’s 2015 decision to phase out the city’s long-running annual practice of scoop-and toss to hold debt service level.
The latest maturity schedule raised eyebrows.
“Rather than use its new rating arbitrage vehicle — the Sales Tax Securitization Corp. — to reduce scheduled GO debt service across its existing maturity schedule, Chicago plans to use the proceeds of an upsized $1.3B refunding this week to generate lopsided budget savings in the first 10 years while extending principal maturities by 13 years,” Municipal Market Analytics managing director Lisa Washburn wrote in the firm’s weekly outlook published Monday.
“Investors, rating agencies, and the state should be alarmed that Chicago has so quickly converted STSC from a pure refunding tool into a budget financing mechanism. This is not quite COFINA, but it’s getting closer,” she added, referring to a similar structure used by Puerto Rico that became tangled up in the commonwealth's Title III bankruptcy.
“The optimal use of the STSC is to use its lower cost of funds to generate the maximum savings for the city within the current debt structure,” she said.
“Anything that looks like it’s going to prolong the life of taxpayers’ burden” on debt issued to pay for services or capital improvements “is not considered to be the best practice,” said Richard Ciccarone, president of Merritt Research Services LLC, who said the program, while generating debt service savings, still appears to resemble a “restructuring” rather than a refunding.
Brown rejects any comparison to scoop-and-toss arguing that the securitization bonds put the city’s debt service on a level and manageable path. Brown also faced a balancing act between leveling out debt service repayments with how much the budget could spare in sales taxes for the securitization.
“The goal was to refund high-cost GO debt with lower-cost debt, to remove from the city corporate fund the need to scoop-and-toss and to finally get to a place where we had a rational borrowing policy and strategy and to lower the overall cost of debt,” Brown said. “What we are trying to do is clean up our debt portfolio and once we are done” the city will have leveled out debt service and it will be more affordable with the revenues in place to cover both the GOs and securitization bonds, she said. “I think this is a responsible way to do it.”
