Sales tax backing shields Chicago transit deal from ridership woes

The Chicago Transit Authority returns to the market with a $345 million issue as it manages through the pandemic’s lingering effects with federal relief and works to lure back riders amid headwinds from remote work trends and crime.

The CTA’s issue of second lien sales tax receipts revenue bonds is slated to price Wednesday with Cabrera Capital Markets LLC as lead manager. Mohanty Gargiulo LLC and Blue Rose Capital Advisors are advising. Mayer Brown LLP and Shaw Legal Services are bond counsel.

The bonds are rated AA-minus by Kroll Bond Rating Agency and A-plus by S&P Global Ratings. Both assign a stable outlook. Proceeds will finance capital work and pay down credit-line draws taken out to pay for projects. CTA has two lines of credit totaling $300 million with $237 million outstanding.

Bloomberg News

The bonds are being offered in serials maturing in 2041 and 2042 and term bonds due in 2047, 2052, and a 35-year bond in 2057.

While the agency remains in recovery mode on ridership, sales taxes held steady and provide healthy debt service coverage.

“The challenges of the COVID-19 pandemic have illustrated the resilience of sales taxes as a revenue source” with 2021 sales taxes surpassing 2020 and pre-pandemic levels from 2019, the CTA said in its investor presentation.

The pot of “sales tax receipts” that comes from the sales tax imposed by CTA parent the Regional Transportation Authority, a share of state sales taxes, and state public transit aid rose 27% from 2020 to $867 million in 2021 and 16% from 2019.

An infusion of new sales taxes from online sales that took effect Jan. 1, 2021, and legalized cannabis a year earlier, helped fuel growth.

"Despite a large 8.9% decline in fiscal 2020, pledged revenue produced actual maximum annual debt service coverage above both liens' additional bonds test, while a strong and swift economic recovery, along with increased tax collections driven by statutory changes that increased online sales tax collections, led to an extraordinary 26.8% increase in pledged revenue for fiscal 2021," said S&P analyst Andrew Bredeson.

“The stable outlook reflects the solid recovery and demonstrated resiliency of sales tax receipts, the importance of public funding to CTA’s operating budget, and the essentiality of transit services to the greater Chicago economy,” Kroll said.

The sales tax pledge and its health will likely stand out for investors but headlines over the CTA’s rise in violent crimes during the pandemic and spike this year don’t help. Any extra yield penalty offers an opportunity for buyers.

“If recent crime headlines cause the new CTA bonds to come cheaper, long-term investors should use this as an opportunity to add bonds. The CTA bonds are backed by sales tax, not farebox revenues, and so the credit is insulated from operating risks,” said John Ceffalio, senior market research analyst at CreditSights.

The long-dated structure also could drive up penalties given the “duration-averse market conditions,” Ceffalio and Patrick Luby, senior municipal strategist, wrote in a report.

Mayor Lori Lightfoot, the Chicago Police Department, and CTA officials recently launched new public safety measures raising the level of police and security guard patrols on trains and buses and at stations. Teams are focused on gang and narcotics crimes on the transit system.

During commuting times, additional contracted security guards are being used. The hope is that the added presence will also help curtail disruptive behaviors like smoking and drinking and vandalism that has been on the uptick.

The flood of $2.2 billion of federal relief the CTA received should help manage operations through mid-2024 as the agency seeks to draw back riders using fare reductions and customer service initiatives.

The state has also given the agency some breathing room to rebuild ridership by waiving through 2023 penalties on aid that require system fare revenues match 50% of operations.

After tumbling to 198 million rides in 2020 from 456 million in 2019, average monthly ridership rebounded 29% last year compared to the last six months of 2020 and the CTA projects 28% growth this year to reach 251 million rides — still far below pre-pandemic levels.

Even if crime eases up, remote work trends pose longer-term strains.

“In our view, CTA's general creditworthiness may face headwinds in the future if the current depression in ridership levels persists as CTA spends the remainder of the substantial federal aid received,” S&P said.

The CTA is operating on a $1.7 billion budget and has a $3.5 billion capital program through 2026 that relies on $737 million of debt.

The numbers don't incorporate the flood of new federal dollars expected from the Infrastructure Investment and Jobs Act President Biden signed in November. The CTA said while 2022 appropriations haven't been finalized yet it expects to benefit from increased transit appropriations and supplemental programs so "new funds and projects" will be incorporated in a 2022 budget supplement.

While the CTA sought to rein in operational costs earlier in the pandemic, it maintained service levels to ensure critical workers could get to their jobs and to leave room for social distancing.