Chicago Returns to Municipal Market After Record Tax Hikeby
Windy City sold $500 million of general-obligation bonds
Bonds yield about 2.3 percentage points more than benchmarks
Chicago still paid a price for mounting pension obligations as the junk-rated city returned to the municipal-bond market for the first time since a record property-tax increase.
The city sold $500 million of general-obligation debt to refinance existing securities and cover some debt-service bills. The federally tax-exempt securities maturing in 2038 sold at a top yield of 4.9 percent, according to data compiled by Bloomberg. That’s about 2.3 percentage points more than benchmark debt, Bloomberg data show.
While the proceeds of the real estate levy will shore up the police and fire fighter pensions, Chicago’s $20 billion pension shortfall across its four retirement funds remain a significant challenge. The city’s bonds traded more than 4 points above benchmark securities this month as Mayor Rahm Emanuel’s administration came under increased criticism.
“The fact that they’ve had those positive reforms has kept the door open in the market for them,” said Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services. “It’s given them the time to fight another day.”
Tuesday’s borrowing came as the Justice Department is investigating the Chicago Police Department and protesters are demanding Emanuel’s resignation because of the handling of the release of a video showing a police officer fatally shooting a black teenager 16 times. Emanuel and local prosecutors have drawn criticism for the 13 months it took to release the video and charge the officer involved with murder.
The city last sold federally tax-exempt general-obligation bonds in July for a top yield of 5.69 percent, about 2.4 percentage points above the benchmark, according to Bloomberg data. The spread on that debt has since climbed about 70 basis points.
“We were very pleased with the work that Citi did on our sale,” Carole Brown, Chicago’s chief financial officer, told reporters during a conference call on Tuesday, referring to Citigroup Global Markets Inc., the deal’s senior underwriter.
The property-tax increase that was approved in October shows that Chicago is working to improve its finances, said John Miller, co-head of fixed income in Chicago at Nuveen Asset Management, which oversees about $100 billion in munis. Chicago has “upside potential” longer term, Miller said.
“The property taxes do show a willingness to start addressing these issues even though it’s not a cure all,” Miller said. “It’s a step towards fiscal improvement, and I think the market’s stronger.”
Investors must take into account the uncertainty regarding the city’s liabilities. Chicago’s plan to save its pensions from insolvency and curb costs is still pending before the Illinois Supreme Court. Investors have said they expect the court to rule against Chicago. The city’s lawyers have said the city’s changes ensure the pensions are fully funded so it should be upheld.
The gridlock in state government isn’t helping. While lawmakers passed a plan to reduce Chicago’s contribution to public-safety pensions, the measure hasn’t been set to Governor Bruce Rauner for his signature. Rauner, a Republican who is locked in a stalemate with the Democrat-controlled legislature, has previously criticized the bill as "kick the can down the road” legislation.
Moody’s Investors Service in May dropped the city to Ba1, one step below investment grade, and didn’t rate Tuesday’s deal. Standard & Poor’s and Fitch Ratings both rank the bonds BBB+, three steps steps above junk.
While Chicago made has “significant progress,” the city still faces challenges, according to Joseph Gankiewicz, a credit research analyst at BlackRock Inc. in Princeton, New Jersey, which oversees $111 billion in municipal debt and owns Chicago bonds.
“It is hard to see a case where the credit greatly improves from here and stability is the task at hand,” Gankiewicz said in an e-mailed statement. “This degree of uncertainty is uncommon in the muni market and is likely to continue to spook traditional buyers.”