CHICAGO — Chicago’s new sales tax securitization bonds proved an easy sell Wednesday for a market hungry for any municipal paper, especially debt that offered an extra yield premium.
The $575 million inaugural sale of Chicago's Sales Tax Securitization Corporation, with double-A and triple-A ratings, was multiple times oversubscribed, said market participants. The deal offered $175 million of tax-exempt paper and $400 million of taxable securities.
The strong demand allowed the city to trim yields from both the pre-marketing levels distributed Monday and again from the preliminary pricing scale. A good portion of the tax-exempts went to retail buyers on Tuesday.
The deal drew more than 70 investors and was five time oversubscribed with a true interest cost of 3.38% that included a TIC of 2.38% on the tax-exempt series and 3.61% on the taxable series, said finance department spokeswoman Molly Poppe.
Worries raised by some market participants about the city's budget pressures, pension obligations, and whether the bankruptcy-remote structure of the new credit can be trusted took a backseat to the market’s thirst for paper.
Tax-exempt yields landed close to the AA benchmark on the bonds that refunded the city’s sales tax-backed bonds. Jefferies ran the books. The city’s 2018 budget relies on about $90 million of savings from the refundings under the program.
“The deal did extremely well, but every deal today is doing extremely well,” said Lyle Fitterer, head of tax-exempt fixed income for Wells Capital Management. “It had additional spread and the market is starved for product” that could shrink in the New Year under the weight of Republican tax bills poised to shrink the municipal bond market.
While the market imposed a penalty on the deal for its link to a city that carries one junk-bond general obligation rating, “obviously people were comfortable buying it,” Fitterer said.
“I think it’s a great result for the city and its cost of capital and the city benefited from a positive market tone and demand from non-traditional buyers,” said Adam Buchanan, senior vice president in institutional sales and trading at Ziegler.
Some crossover buyers could be looking to capitalize on the potential tax reform changes.
Some market participants cautioned against ascribing too much of the demand to the qualities of the security itself. They attributed the demand first to a market hunger for municipal debt with yields shrinking on Tuesday when the 10-year opened at 2.05%, and further improving into Wednesday where it closed at 1.88%.
Investors are worried that supply could dry up in the New Year given threats posed to private activity bonds and advance refundings under tax reform proposals. That’s also prompted the issuers to rush into the market and so could make for a sparse first quarter. Concerns are also mounting over the debt ceiling.
The bonds carry AAA ratings from Fitch Ratings and Kroll Bond Rating Agency and are rated AA by S&P Global Ratings.
The attractive yield spreads offered for a AAA credit and the opportunity to add a new name and one that is highly-rated and out of Illinois which some managers might be short on also added to the appeal.
The tax-exempt 10-year landed at a yield of 2.22%, a spread of 23 basis points to where the Municipal Market Data’s top-rated benchmark closed at 1.99% on Tuesday and a spread of five basis points over the AA. The AAA 10-year closed Wednesday at 1.88%.
The spreads show the attractiveness of the new credit for the city as its GO bonds have been trading at around 170 basis points. It saw record high spreads of more than 300 basis points on its tax-exempts and about 450 bp on its taxable in its last GO sale early this year.
Chicago held investor meetings in Chicago, Boston, and New York City. Chicago’s chief financial officer, Carole Brown, sought to make the legal case for the bankruptcy-remote structure that removes it from city pressures, while highlighting distinctions between Chicago's securitization vehicle and the Puerto Rico Sales Tax Financing Corporation, issuer of sales tax debt that became entangled in Puerto Rico's Title III bankruptcy process. Some market participants have warned that the sturdiness of such structures can’t be known until tested in the courts.
The 2020 maturity in the tax-exempt deal landed at 1.70%, a 17 basis point spread to the AAA and 11bp over the AA, and seven basis points better than the preliminary pricing. The long 2030 maturity landed at 2.40%, 24 basis points over the AAA and just three basis points over the AA, and 15 basis points better than the preliminary pricing. The maturities offered 5% coupons and a premium price.
The pre-marketing wire distributed Monday anticipated spreads at 30 to 45 basis points on the tax-exempts.
The taxable maturity in $25 million 2031 landed at 105bp spread to comparable Treasuries, the $26 million 2032 maturity landed at a 110 spread and a $350 million 2043 maturity ended at an 87.5 bp spread.
Treasuries were also stronger Wednesday. The yield on the 10-year Treasury yield declined to 2.33% from 2.36% and the yield on the 30-year Treasury decreased to 2.71% from 2.74%.
The pre-marketing wire anticipated spreads to comparable Treasuries of 70, 75, 100, and 105 basis points. The city dropped two maturities in 2033 and 2034 and put the roughly $50 million in the final 2043 maturity that drove it up to about $350 million.
In comparison, Chicago’s GO spread penalties peaked on its nearly $1.2 billion general obligation sale early this year with spreads landing at 339 to 347 basis points over the AAA as the city was burdened by the then-lack of a state budget and Chicago Public Schools woes.
That compared to 229 to 253 basis points on a 2016 sale and 293 basis points in a 2015 issue with its May fall to junk rating from Moody’s Investors Service fresh on investor minds.
On the taxable 2029 bullet maturity for $274 million in the sale earlier this year, the yield landed at 7.47%, about 457.5 basis points over the comparable Treasury security with a make whole call.
In early 2018, the corporation will return to current refund $905 million of GOs. Under state legislation approved over the summer, the city created the STSC and sold off is state-collected sales taxes which are pledged to repayment of the new bonds. The city has also established a dedicated
--Chip Barnett and Aaron Weitzman contributed to this story.
