Chicago delayed a $383 million bond sale it was planning for Tuesday after its credit rating was cut last week, according to a city official familiar with the matter.
The third-most-populous U.S. city still expects to return to the market in the coming weeks as part of a plan to convert about $800 million of variable-rate general-obligation debt to fixed rates by mid-June, said the official, who asked not to be named without authorization to speak publicly.
Chicago is evaluating options to sell bonds at the lowest cost possible after Moody’s Investors Service lowered the city’s rating to junk last week, the official said. The downgrade threatens to raise Chicago’s borrowing costs as investors demand higher yields on its securities and exposes it to penalties tied to the floating-rate debt.
“The market is still reeling a bit from the Moody’s downgrade,” Michael Johnson, managing partner at Gurtin Fixed Income Management, which oversees $9 billion of munis in Solana Beach, California. For Chicago, “taking a bit of time to look at their situation and look at their options is probably a smart thing to do right now.”
The delay shows the challenges for Mayor Rahm Emanuel, who began his second term Monday, as he moves to end some interest-rate swaps and refinance debt. With the loss of its investment-grade rating, banks have the right to force Chicago to pay as much as $2.2 billion to break derivative contracts and repay variable-rate debt ahead of schedule. Refinancing will reduce those penalties.
Federally tax-exempt Chicago bonds maturing in January 2040 traded Monday at yields as high as 6.27 percent, close to the highest since August 2013, data compiled by Bloomberg show. The spread of 3.08 percentage points over benchmark municipal bonds compares with about 2 percentage points at the start the year. They were Monday’s most-traded Chicago bonds.
The four series of bonds to be refinanced may come to the market all at once or in two groups, according to the official.
The city isn’t new to putting off deals: The Chicago Board of Education postponed a $372 million bond sale in March after downgrades to the brink of junk. When it offered a pared-down deal three weeks later, it still paid 2.7 percentage points more than benchmark munis to issue some debt.
The school board was the most-traded municipal-bond issuer Monday, with about $90 million of fixed-rate debt changing hands, data compiled by Bloomberg show. Chicago ranked fifth.