January 17, 2020 / 12:32 AM / a month ago

Chicago bond refunding produces budget savings, lower market penalty

CHICAGO, Jan 16 (Reuters) - Chicago wrapped up a $1.47 billion bond refunding on Thursday that produced enough savings to help plug a budget hole through deals that benefited from low supply in the U.S. municipal market and yield-hungry investors.

A big yield penalty the nation’s third-largest city has been paying in the market due to its chronic budget deficits and large unfunded pension liability eased substantially with the pricing of $466.5 million of general obligation (GO) refunding bonds and $1 billion of Sales Tax Securitization Corporation tax-exempt and taxable bonds.

Dan Solender, who heads tax-free fixed-income investments at Lord Abbett, said the city got a boost from high demand for bonds “especially those with extra yield such as Chicago.”

“Even though Chicago clearly still has issues they have made some financial progress to stabilize from their previous downward trend,” he added.

The bond refunding, which was the biggest component of Mayor Lori Lightfoot’s plan to eliminate an $838 million deficit in the city’s fiscal 2020 budget, produced an upfront savings that exceeded a target of $210 million, a city spokeswoman said. The spread over Municipal Market Data’s (MMD) benchmark triple-A yield for 10-year tax-exempt GO refunding bonds eased to 105 basis points from 170 basis points for comparable bonds the city sold last year, according to MMD.

For tax-exempt second lien Sales Tax Securitization Corporation bonds maturing in 10 years, the spread over MMD’s scale was just 62 basis points, 21 basis points lower than the spread for senior lien bonds priced in 2018.

The corporation was created under former Mayor Rahm Emanuel as a way to refund outstanding debt with higher ratings and lower yields by giving investors a statutory lien on the city’s share of state sales taxes. (Reporting By Karen Pierog; Editing by Cynthia Osterman)

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