Chicago wrapped up the pricing on $1.45 billion of refinancing bonds Thursday after structural tweaks and a $1 billion tender and exchange allowed the city to scale back on the deal’s size and still meet a $250 million savings target.

A look at the 10-year in the tax-exempt pieces showed spreads narrowed sharply from the last general obligation and Sales Tax Securitization Corp. deals in 2020 to fresh lows in recent memory, although they did land wider to recent trading evaluations. The city’s tax-exempt GOs saw spreads of plus-33 to 86 basis points to triple-A benchmarks. The 15-year bond in the taxable STSC bonds widened from the 2020 results as city headed into a market dealing with massive U.S. Treasury market volatility.

The pricing began Tuesday with a tax-exempt GO refunding tranche for $447 million, continued Wednesday when $610 million of taxable second lien STSC bonds were sold amid headwinds from swings in Treasury prices, and stretched into Thursday when $394 million of tax-exempt second lien STSC bonds were priced for a total par amount of $1.45 billion.

The deal provided proceeds to cover $1 billion of tendered bonds and a second GO series for $219 million will cover exchanged bonds, but those prices are set in the exchange so they were not part of the bonds being publicly offered.

That bolstered the overall size of the refinancing to $1.67 billion after the city cut out about $500 million of borrowing that had been planned earlier in the week.

“We pulled back on the taxable advance refunding component” in the taxable STSC series because the strong results on the tender/exchange allowed the city to hit its “2021 and 2022 budgetary savings target,” Chicago’s Chief Financial Officer Jennie Huang Bennett said in an interview Friday. “Hitting the savings target is what our primary objective is. We are going to save those for next year. The closer we get to the call date on them they become more efficient.”

The city targeted about $250 million of savings for the refinancing for Mayor Lori Lightfoot’s 2021 and 22 budgets. About $109 million of savings came from the tender/exchange.

While that could ordinarily add to structural budget woes as similar savings won’t be seen in future years, Bennett stressed that’s not the case here as the savings will primarily cover a retroactive police raise under a contract struck this year. “This refinancing basically is going to pay a one-time expense,” Bennett said.

The overall true interest cost landed at 2.7%. The city said overall the bonds were 2.1 times oversubscribed with 73 investors submitting orders, 15 new GO investors and 17 new tax-exempt STSC buyers. The city offered concessions from the original pricing scale on the GOs of a few basis points.

Loop Capital Markets and Goldman Sachs served as senior managers with Loop running the books. Nine other firms rounded out the syndicate. PFM, Swap Financial Group LLC, and RSI Group LLC advised the city.

The city’s decision to cut the taxable STSCs had led some market participants to speculate that the city lacked buyers. The STSC was “priced too high,” said a member of the buy-side who holds Chicago paper but did not participate. He said he believed the taxables lacked demand from the market.

Bennett’s deputy Jack Brofman countered that and said the STSC taxable tranche was 3.4 times oversubscribed based on the final pricing scale.

The city headed into the market with an improved credit picture with its rating outlooks returning to stable and strong investor demand for any incremental yield penalties borrowers like Chicago typically offer.

But the city also faced competition from a crowded calendar and while the tax-exempt market held steady, the city faced Treasury volatility driven by the pandemic, economic and inflationary pressures, and the federal government’s anticipated tightening of monetary policy.

“The taxable market was volatile and there were a lot of deals making their way through. I think we all navigated in a similar way where we landed,” Bennett said. “That’s part and parcel of pricing in a volatile market. Ultimately what we ended up was our budgetary targets and we are obviously very excited about that and the ability to reserve about half billion of advance refunding for next year’s budget.”

Proceeds of the deals will refund GO, STSC, motor fuel revenue bonds, a federal TIFIA loan, pay down tendered and exchanged bonds, and capitalized interest.

Pricing details
On Tuesday, the city offered $447 million of tax-exempt refunding general obligation bonds. The tax-exempt GOs “with some concessions in the repricing, with yields rising on bonds by two to five basis points and spreads of 33 to 86 basis points to Refinitiv MMD’s early scale,” Municipal Market Data-Refinitiv said in its market close report Tuesday.

The 10-year was offered with a 5% coupon and yield of 1.64%, 61 basis points over the AAA. That a little wider than recent trading evaluations but still good news for the city as it was down from the 10-year in a 2020 refinancing that landed at a 109 basis point spread over the AAA benchmark. That level marked a decade low for the city which saw a 169 basis point spread on its 2019 issue.

The city on Wednesday sold $610 million of taxable STSC refunding bonds and followed Thursday with a series for $394 million of tax-exempt paper. The city set up the STSC in 2017 as a higher-rated, bankruptcy remote vehicle to refinance outstanding GO debt at greater savings.

The tax-exempt STSC tranche offered maturities from 2024 to 2034 all with 5% coupons with a 0.47% yield on the 2024 bond, a 1.42% yield on the 10-year, and 1.78% on the 2034. Most maturities saw two to five basis point bumps in repricing.

The 10-year saw a spread of 39 basis points to the AAA. It landed wide to where it had been trading recently, at 25 basis points, but marked an improvement from the 62 basis point spread on the 10-year in the city’s 2020 sale and 83 basis point spread on its previous sale.

The taxable STSC tranche offered bonds maturing in 2023, 2036, 2042, and 2048 at yields of 0.79%, 3.118%, 3.238% and 3.338%. The spread to Treasuries on the 15-year bond settled at 160 basis points wide to the 2020 results, according to MMD-Refinitiv. The longer maturities saw spreads of 135 basis points and 145 basis points. The 15-year bond in the 2020 sale landed at a 127 basis point spread and had more recently been evaluated at a 132 basis point spread.

Chicago last year conducted its first tender/exchange to holders of $1.8 billion of high-interest taxable bonds as part of a $1.5 billion GO/STSC refunding. The $370 million of tendered bonds contributed $40 million to the overall $310 million of savings providing budgetary relief in 2020 and 2021.

The 2020 deal didn’t include an exchange. “Our buyers by and large want to hold onto” the city’s bonds so the exchange offered the opportunity to continue holding bonds with added duration from a longer call date in an “offering we were able to make that generated some benefit for us as well as well as investors,” Bennett said.

Bennett also stressed that all maturities achieved savings and no debt is being pushed out or scooped-and-tossed as was a common practice on city GO sales under former mayors Richard M. Daley and Rahm Emanuel.

“Every year has savings and there’s no extension of maturity” and the average life of the new bonds is shorter than the existing average life, Bennett said.