(Adds credit spread comparisons, comments from Chicago CFO and portfolio manager, upcoming Illinois bond sale)
CHICAGO Jan 12 Chicago continued to pay a hefty penalty in the U.S. municipal market on Tuesday for its budget and pension woes with the city's $500 million bond issue priced with a top yield of 4.875 percent.
That yield for bonds due in 2038 with a 5 percent coupon is 229 basis points over Municipal Market Data's benchmark scale for AAA-rated debt. The city's so-called credit spread over the scale narrowed since a July bond sale, which resulted in a 252 basis-point spread for bonds due in 2039.
Underwriters led by Citigroup on Tuesday repriced the general obligation bonds with lower yields in several maturities, with the 2038 yield falling to 4.875 percent from an initial 4.93 percent and Monday's premarketing level of 4.95 percent.
Chicago Chief Financial Officer Carole Brown told reporters that the deal, which resulted in an overall 4.5 percent interest rate, attracted 2.5 to 3 times more orders than there were bonds.
"They definitely found the demand they needed," said Dan Solender, lead municipal portfolio manager at Lord Abbett. He added that the bonds' pricing reflects market concerns over how the third-largest U.S. city will solve its fiscal problems.
While the Chicago City Council passed a phased-in, $543 million property hike in October to pay for pensions, Illinois legislative fixes to further address the city's $20 billion unfunded pension liability remain up in the air. The city's outsized pension burden led Moody's Investors Service to drop Chicago's credit rating to "junk" last year.
The city's credit spreads are wider than Illinois' 170 basis-point spread. Illinois, which has the lowest credit rating and worst-funded pensions among the 50 states, and is in the midst of a political standoff that has left it without a budget six months into fiscal 2016, is slated to sell $480 million of GO bonds on Thursday.
Chicago's deal refunded $280 million of bonds for a present value savings of $14 million and restructured $220 million of bonds to push out debt service payments to free up revenue for the city's cash-strapped budget. Mayor Rahm Emanuel has called for ending bond restructurings by 2019.
The city council on Wednesday will take up the mayor's plan to sell more than $2 billion of new and refunding bonds to raise funds for capital projects and rid the city's debt portfolio of variable rate bonds.
(Reporting by Karen Pierog; Editing by Matthew Lewis)