Chicago launched a tender/exchange offer to holders of $4.3 billion of general obligation and motor fuel tax-backed bonds as part of a long planned $1.25 billion refinancing set for next month to help balance its 2021 and 2022 budgets.

The city will refund various GO, motor fuel, and Sales Tax Securitization Corp. debt in the two transactions. The GO-backed deal currently totals $271 million and will sell in three series with one series to be decided based on the tender and exchange.

The A series tentatively offers $224 million of tax-exempt bonds maturing from 2025 to 2036 along with a potential term bond; the B series will be determined based on the city’s exchange decisions; and a third series totaling $47 million will be due in 2024.

Another $981.5 million of refunding debt will sell under the STSC’s second lien with a taxable and tax-exempt tranche expected.

The city expects to price one deal Dec. 6 and the other the following day although it’s not yet decided whether the GOs or STSC transaction will come first, city officials said Tuesday.

Loop Capital Markets LLC and Goldman Sachs are senior managers on the refinancing and are serving as dealer manager on “any tender, exchange, open market purchases or privately negotiated transaction,” according to a city investor notice posted Tuesday. Globic Advisors is the tender agent.

The city will take most of the savings — previously estimated at $254 million — upfront relieve one-time pressures on the current budget.

“The deal will be structured to generate savings in 2021 and 2022 without increasing debt service in any future year,” Chief Financial Officer Jennie Huang Bennett’s office announced Tuesday. “Savings will be used to help pay for $232 million of retroactive Fraternal Order of Police wage increases included in the amended 2021 budget as well as to cover a small portion of 2022 budget costs.”

Proceeds of the GOs will refund GO debt and purchase tendered bonds. Proceeds of the STSC bonds will refund GOs, STSC debt, motor fuel tax bonds, purchase tendered bonds, and repay a federal TIFIA loan.

Both capitalize interest, according to the GO offering statement published late Tuesday with the STSC documents expected later in the week. It’s a practice the city has used on refundings as a means to bolster upfront savings but it’s frowned up on by market participants when used outside of new money deals with a project construction period.

The structure mirrors the city’s $1.5 billion January 2020 refunding under its GO and STSC credits that generated $310 million of savings for budget relief for 2020 and 2021. The city used much of the savings to help close a more than $800 budget gap and while savings were taken up front, the deal, like the upcoming one, doesn’t scoop-and-toss near-term debt service, a practice long used by the city until several years ago.

The city’s first tender invitation in 2020 to holders of up to $1.8 billion of high-interest-rate taxable bonds helped bolster the deal’s savings. The $370 million of tendered bonds that was built into the refunding transaction generated $40 million in savings.
The new tender invitation closes Dec. 3. The city will then decide what tendered bonds will be purchased with either proceeds of the GO or STSC issue and exchanged bonds will be exchanged with the Series B GO bonds.

“You are receiving this letter, because the city is offering to purchase your bonds for cash, or in the case of certain institutional holders, the additional option to exchange their bonds for new bonds to be issued by the City,” the invitation reads. “The city is making this offer available to you in connection with a plan to refinance a portion of our outstanding debt.”

The city will publish a notice of purchase prices and exchange factors on or around Nov. 26. The tender/exchange invitation covers the city’s GO Series 2002B, Series 2003B, Series 2005D, Series 2007E, Series 2007F, Series 2007G, Series 2009B, Series 2010C-1, Series 2011B, Series 2012B, Series 2014A, Series 2014B, Series 2015A, Series 2015B, Series 2015C, Series 2017A, Series 2019A and Motor Fuel Tax Revenue Refunding Bonds Series 2013.

The deadline to submit tender offers is Dec. 3 and the acceptance date is set for Dec. 6 with determination of the taxable GO tender bonds purchase price occurring Dec. 8. Settlement is set for Dec. 22.

Chicago will head into the market on a rating upswing with all four rating agencies having moved the outlook in recent months on Chicago GOs back to stable from negative.

S&P Global Ratings Nov. 3 affirmed the city’s BBB-plus rating and lifted the outlook. The action followed the city council’s adoption of a $16.7 billion 2022 budget and passage of $4.4 billion of new money and refunding debt authorization.

Moody’s Investors Service revised its outlook to stable in July. It remains the lone agency that holds the city’s GOs below investment grade at Ba1. Kroll Bond Rating Agency rates the city A and recently affirmed it ahead of the upcoming sale. Kroll returned the outlook to stable in August. Fitch Ratings which rates Chicago BBB-minus lifted its outlook in October and it recently affirmed the rating.

The STSC second lien bonds carry ratings of AA-minus and stable outlook from Fitch and S&P and an AA-plus from Kroll. First-lien bonds under the program launched in 2017 carry the same Fitch and S&P ratings and a AAA from Kroll.

The ratings stem from a lien on the state-collected portion of the city’s home rule sales and use taxes and the local share of the state-wide sales and use taxes and sale to a bankruptcy-remote, statutorily defined special purpose entity.

The refunding kicks off as much as $8 billion of city new money and refinancing borrowing planned through 2023 under the GO, STSC, airport, and water and wastewater enterprise systems.

The city should find an amiable investor reception as federal aid and stable outlooks at least temporarily drown out worries over how the city will structurally balance its books once the aid dries up and action needed to improve the city’s pension funded ratios, market participants say.

The city captured tighter spreads than seen in a decade on its 2020 GO sale. The 10-year landed at a 109 basis point spread over the Municipal Market Data’s AAA benchmark compared to 169 bp spread on its 2019 issue. The 10, 11, and 12 year bonds in the 2020 deal are currently trading in the 48 to 58 bp range. The 10-year STSC bond last year landed at a 62 bp spread to the AAA compared to an 83 basis point spread on the previous deal. It has since narrowed to 26 bps.