Chicago attracted high-profile investors not seen in years when it sold $533 million of bonds last week in the first general bond offering to benefit from a series of positive rating actions that wiped out the city’s only undesirable rating.
Chicago jumped into the market Thursday with a long-planned show.
After holding a series of investor meetings and one-on-one calls and with the market looking more favourable, the city’s finance team decided to fast-track the sale which was recently scheduled for the start of the year. next.
“As we watched the market, it became clear that the market was reacting very strongly to the CPI data that was coming out, to the economic data that was coming out, and ultimately there was real strength in the muni market due to lack of supply,” said chief financial officer Jennie Huang Bennett.
Investors scooped up the bonds, submitting $4.5 billion worth of orders to new high profile investors, including insurance companies that had previously shunned the city’s GO paper. This gave the city “price leverage,” Bennett said, and the city opted to take the deal from $413 million to $533.
While City spreads have widened since its last primary market exit late last year, as they have between issuers, they have narrowed by 30 to 50 basis points in the final secondary market trading spread price earlier in the fall.
“We saw great pricing,” Bennett said. “It was a demonstration of the impact of the upgrades.”
Bennett and the finance team met with investors in New York and held one-on-one calls to promote a series of positive rating actions that followed the passage in early November of the city’s 2023 budget which implemented a new pension funding policy aimed at supplementing contributions to contain the growth of liabilities.
Fitch Ratings raised the city’s rating from BBB-minus to BBB and gave it a positive outlook. The rating agency Kroll Bond has revised the outlook of its A rating to positive. Moody’s Investors Service raised the rating to Baa3 from the undesirable level of Ba1 and assigned a stable outlook. S&P Global Ratings changed the outlook from stable to positive on its BBB-plus rating.
Prior to the transaction, city bonds typically traded over 200 basis points against Municipal Market Data’s triple-A benchmark index. The 10-year with a 5% coupon in Thursday’s GO sale landed at 4.09%, a spread of 151 basis points from the benchmark AAA index. The long bond maturing in 2043 with a 5.50% coupon in the trade landed at 4.83%, a spread of 155 basis points from AAA.
Coupons on various maturities included 5s, 5.25s and 5.50s to meet market demand for premiums and discounts. Some bonds have early calls, which gives the city more flexibility as it manages its debt portfolio ensuring that it preserves the ability to call bonds in years when budget savings are needed.
“As we were looking at the prices, investors were interested in the maximum return,” Bennett said. “We sold some bonds with two call options ‘in 2030 and the traditional 10-year call in 2032,’ and we put the shortest call on long bonds where there was a maximum yield.. .actually a two year short call free option.”
RBC Capital Markets, Siebert Williams Shank & Co. and UBS were the lead managers.
The GOs were rated by Fitch, Moody’s and S&P and the sale was the city’s first in at least seven years to carry a Moody’s rating after the city froze Moody’s when the agency trashed Chicago in 2015.
With interest rates steadily rising through November, spreads had widened sharply since the city’s last sell-off in December, when its GO’s 10-year yield posted a 61 basis point spread from compared to the benchmark MMD AAA index. This bond was valued at 233 basis points last month, but after last week’s sell-off, it narrowed to a spread of 157 basis points.
Chicago bonds don’t trade often because much of the GO paper is concentrated among a handful of holders, so the deal provides new price discovery that now sets the tone for secondary trading levels.
The municipal bond market saw inflows — at $46 million — for only the second time in 18 weeks, Refinitiv-MMD said in a review of market performance last week. December buybacks and a supply shortage helped.
“It was an opportune time for Chicago,” said Daniel Berger, senior market strategist at Refinitiv-MMD.
Chicago will return the week of Jan. 18 with a new $157 million contract as part of its Sales Tax Securitization Corp. which will include the city’s first designated social bonds in a $103.6 million tax-exempt series and a $53 million taxable series.
The transaction could also include a refund coin. Kestrel Verifiers provided third-party advice that it complies with social bond principles and the city named seven specific projects ranging from tree planting and vacant land removal to affordable housing and electrification of its fleet that can be tracked for investors, Bennett said. .
UBS, RBC and Siebert are the leaders.
The city will issue the new funds under its STSC preferred credit with ratings AA and positive outlook from Fitch, AAA and stable from Kroll, and AA-minus and positive from S&P. The redemption coin will sell under second lien and carry ratings of AA-minus and stable from Fitch, AA-plus and stable from Kroll, and AA-minus and positive from S&P.
The city’s 10-year STSC bond from the December 2021 issue saw a spread of 39 basis points and was last month valued at 111 basis points. It’s currently rated at 102 bps, according to Refinitiv-MMD.
Bennett promoted the city’s pricing results with tighter spreads leading to lower interest costs and rating actions at a finance committee meeting on Monday to head off a bid to repeal an automatic annual increase in the inflation-based property tax that Lightfoot got approval for last year. Increases must be used to cover pension contributions and are capped at 5%.
Alderman Brendan Reilly sponsored the ordinance which failed in a 17-11 vote to move forward. Reilly called the automatic CPI increase “smoke and mirrors for this administration and future administrations to hide behind when they want to justify future property tax increases.”
Bennett countered that the CPI measures positive factors with bondholders and bond evaluators and she read comments in recent reports listing the annual rise in the CPI as a characteristic that helps balance. structural by providing an annual source of recurring revenue. It also avoids the political risk associated with selling big raises like the over $500 million raise in 2015.
“The city is finally coming out of a history of poor financial decisions” and the municipal market and tax watchdogs are monitoring “how we exercise fiscal discipline now that our finances have improved,” Bennett told the committee. “This order before you today puts all of those financial achievements at risk.”
In meetings last week with 25 institutional investors, the city answered questions about the political will to keep the CPI increase and supplemental pension contributions going, Bennett said.
“Rating agencies, bondholders and municipal markets view the political will to raise revenues as a critical factor,” she said.
The city could have sought the maximum 5% hike to generate an additional $80 million for the recently approved Enterprise Fund’s $5.4 billion budget for 2023, but with higher-than-expected surplus revenue, it has decided to drop it given the expected opposition from the board. The levy increased by $25 million based on new properties on the tax rolls.