Investors scramble for Chicago bonds despite credit downgrades

CHICAGO, March 13 Thu Mar 13, 2014 3:46pm EDT

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CHICAGO, March 13 (Reuters) - Investors flocked to Chicago's $883 million bond sale this week, though the city paid a higher price to borrow than at its last general obligation offering in 2012.

The sale, which also included taxable bonds, was Chicago's first GO offering since Fitch Ratings and Moody's Investors Service downgraded its credit last year, mostly on concern about the city's underfunded public pensions.

Moody's was active as recently as last week, cutting Chicago's rating one notch to Baa1.

New tax-exempt bonds due in 2036 priced at 161 basis points over comparable maturity top-rated bonds on Municipal Market Data's benchmark yield scale. In the city's 2012 sale, the spread for comparable Chicago bonds was 89 basis points over the scale, according to MMD, a unit of Thomson Reuters.

The deal, which priced on Wednesday through Wells Fargo, attracted $3.65 billion in orders from institutional investors, including dozens that had not bought the city's bonds before, Lois Scott, Chicago's chief financial officer, said on Thursday.

She said investors were increasingly relying on their own credit research and less on rating agencies.

"Financial problems can be solved," she said. "(Investors) looked at what we've been doing."

The bond sale, which the city increased in size, benefited from a safe-haven bid that boosted prices and lowered yields in fixed-income markets, as well as a supply drought in the $3.7 trillion municipal market.

The pricing of $432.6 million of tax-exempt bonds that carried maturities out to 2036 resulted in a true interest cost of 3.77 percent, according to Scott.

Chicago, which faces a $600 million state-mandated jump in payments to two of its four retirement systems next year, has been looking to the Illinois legislature to enact cost-savings pension reforms or to curtail the looming payment.

Scott pointed to momentum in the Democratic-controlled legislature, which passed comprehensive pension reform last year for state retirement systems and for the Chicago Park District.

"We remain optimistic the legislature will address our challenges in a helpful and meaningful way," she said.

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