Chicago plans to return to the market in force over the next year to tap a portion of $4.66 billion of existing borrowing authority and $4.4 billion of newly requested capacity in a mix of new money and refunding deals under its general obligation, securitization, and revenue-backed credits.
A tender offer is also under consideration.
Mayor Lori Lightfoot submitted a total of $4.4 billion of new borrowing authority to the City Council Thursday that would pave the way for revenue-backed borrowing under the city’s water, wastewater and airport enterprise systems as well as $660 million of GOs. The GO paper would support $1.2 billion of planned COVID-19 pandemic recovery investments and would be tapped over multiple years.
The administration is asking the council to sign off on the new authorizations in tandem with consideration of an all funds $16.66 billion 2022 budget with a $4.88 billion corporate fund. Another $4.66 billion of bonding capacity remains on the books under various credits and the city intends to tap a portion of it later this year and in 2022.
“The city intends to take advantage of the current low interest rate market with plans to execute over $3 billion in refinancings generating over $600 million in savings as well as financings for capital improvements across the city including that for the Chicago Works Capital Plan, Chicago Recovery Plan, O’Hare 21 capital plan, Midway Modernization Plan, as well as the water and sewer capital plans,” said the city’s Chief Financial Officer Jennie Huang Bennett.
Yvette Shields
First up, the city plans to move forward later this year with a previously authorized $1.2 billion refinancing. The city will refund GOs, a River Walk federal TIFIA loan and motor fuel bonds mostly under its higher-rated Sales Tax Securitization Corp. second-lien credit. Any bonds that push up against STSC-required debt service coverage ratios would be issued using the GO credit.
The city will take most of the savings — estimated at $254 million — upfront, most of which will go to help cover a retroactive pay raise for police under a newly minted contract. Bennett stressed the city won’t push off repayment and there’s savings in all maturities throughout the amortization schedule.
Whether a federal budget reconciliation bill that restores the ability to advance refund bonds passes will influence the sizing of the transaction. If advance refundings are restored “it would help us achieve those [savings] targets more quickly,” Bennett said.
Loop Capital Markets LLC and Goldman Sachs will serve as senior managers on the $1.2 billion refinancing.
The city also intends to tap existing refinancing authority of up $1.2 billion for a bond exchange/tender offer. The city last year invited holders of $1.8 billion of higher yielding bonds to tender their bonds with $370 million tendered, generating $40 million of interest savings.
Any additional savings would be considered “gravy” that would “help support our overall financial plan,” Bennett said. The tender would be folded into the $1.2 billion refinancing previously mentioned.
The city posted an investor notice Wednesday alerting holders that it was “evaluating potential alternatives for refinancing” GO and motor fuel tax-backed bonds from series dating back to 2002 and through 2019 that could involve a tender. The city may reach out directly to holders or through the senior managers — Loop and Goldman. Globic Advisors is the information agent and tender/exchange agent, according to the notice.
The city also plans to begin tapping in 2022 a portion of $1.5 billion of new money general obligation debt authorized by the council last year for the city’s multi-year $3.7 billion capital program.
The amount is not yet set as the city pays for projects through an existing credit line and then moves it to long-term debt when it hits about $500 million.
The $1.5 billion will tapped over multiple years. RBC Capital Markets, Cabrera Capital Markets LLC, and UBS were previously named as senior managers on the first tranche with Barclays and Loop Capital Markets LLC leading the second, and BofA Securities and Cabrera leading the third.
New authority
If approved by the council later this month, the city would tap the $660 million GO authorization in multiple tranches that extend beyond 2022 and the first would be folded into the first borrowing planned under the $1.5 billion 2020 capital budget authorization.
The remainder of the $1.2 billion investment program unveiled by Lightfoot last month is funded with the portion of the city’s $1.9 billion left over pot of federal relief from the American Rescue Plan Act after $1.3 billion is used for budget relief through 2023 to make up for pandemic-related revenue blows.
The new ordinances that went to the council Thursday also permit $1.2 billion of borrowing that’s about equally divided between new money and refunding revenue bonds under the city’s wastewater and water enterprise systems.
Mesirow Financial and Estrada Hinojosa & Co. would lead the water piece. Stifel and PNC Capital Markets LLC will lead the wastewater transaction. The deals are planned for the first half of 2022.
Another ordinance authorizes $1.55 billion of borrowing for O’Hare International Airport including $700 million of new money and $850 million of refunding. The city has another $760 million of existing capacity already on the books. The deal is planned for the second half of 2022.
The transaction being sold under O’Hare’s general airport revenue bond credit would be led by JPMorgan, Citigroup, and Cabrera Capital Markets LLC. Another piece being sold to refund O’Hare customer facility charge bonds would be led by Barclays and Ramirez & Co.
The $1 billion Midway deal that includes $100 million of new money would be led by Jefferies, BofA Securities, and Siebert Williams Shank. That deal is planned for the fourth quarter of 2022.
The city’s GOs carry a BBB-minus from Fitch Ratings, an A from Kroll Bond Rating Agency, a junk level rating of Ba1 from Moody’s Investors Service, and BBB-plus from S&P Global Ratings. Fitch and S&P assign a negative outlook and Moody’s and Kroll moved the outlook this year to stable from negative.
The city’s Sales Tax Securitization ratings range from double-A to AAA, depending on the lien. The city’s airport bonds carry A-level ratings with the exception of the customer facility charge bonds that are rated in the BBB category. The water and wastewater bonds are rated in the single-A to double-A category, depending on the lien, with Moody’s holding both to the Baa category.
The city has not decided whether to seek ratings on any of the deals from Moody’s. The Rahm Emanuel administration stopped using the rating agency sinces the city’s revenue credits tumbled in tandem with its GO rating, because the rating agency links them.
“We are having conversations with them, but we haven’t decided about asking them for a rating,” Bennett said.
The city recently refreshed its list of qualified underwriting firms after conducting a request for qualifications process over the summer. A total of 46 firms were named as qualified underwriters and the city drew from the list for the new ordinances while leaving intact teams named for deals approved last year.
The council’s Finance Committee will take up the new authorizations at a meeting next week. Whether Lightfoot’s council critics will push back on the borrowing plans or tie their support to budget requests remains to be seen.
High levels of minority participation in the financing teams when also counting bond counsel and advisors could help tamp down push back, as inclusion levels often draw the most questions from council members.
“Participation from minority firms represents 52% of all bond transactions, double the minority participation in deals prior to Mayor Lightfoot’s administration,” a report on the deals reads.
Latino-owned and African-American-owned firms each account for 26% of the work, with women-owned firms receiving 1% and disabled-veteran owned firms 1%. The city’s goals are set at 25% to minority and 5% to women-owned firms.