December 6, 2017 / 9:47 PM / a year ago

Chicago sells new kind of debt amid strong muni demand

CHICAGO, Dec 6 (Reuters) - Strong demand in the U.S. municipal bond market drove yields lower on a Chicago bond sale under a new debt structure on Wednesday.

The $575 million of tax-exempt and taxable bonds were the first to be sold by the city’s new Sales Tax Securitization Corporation and came to market as U.S. muni bond prices rallied amid a huge surge in supply.

“Overall, they probably have to be thrilled. They couldn’t have picked a better market to price into,” said Greg Saulnier, a Municipal Market Data (MMD) analyst.

Chicago created the corporation earlier this year to refinance up to $3 billion of its sales tax revenue and general obligation bonds and produce an initial $94 million in savings for the city’s fiscal 2018 budget.

A chronic structural budget deficit and a huge unfunded pension liability that totaled $35.76 billion at the end of 2016 have led to low credit ratings and increased borrowing costs for the nation’s third-largest city.

The corporation pledged Chicago’s state-collected sales tax revenue to pay off the new bonds. Investors get a statutory lien shielding the debt from municipal bankruptcy, which is not allowed under Illinois law. The bonds are rated AAA by Fitch Ratings and AA by S&P Global Ratings, both of which are several notches higher than the city’s GO ratings of BBB-minus by Fitch and BBB-plus by S&P.

Underwriters led by Jefferies repriced $174.56 million of tax-exempt bonds in Wednesday’s deal with the top yield falling 15 basis points to 2.40 percent for bonds due in 2030 with a 5 percent coupon. That resulted in a 28 basis-point spread over Municipal Market Data’s (MMD) benchmark triple-A yield scale.

By contrast, Chicago’s GO bond sale last January included a higher coupon of 6 percent and resulted in spreads over the MMD scale exceeding 300 basis points.

Underwriters also priced $400.6 million of the corporation’s taxable bonds at par with coupons of 3.372 percent in 2031, 3.422 percent in 2032 and 3.587 percent in 2043.

Some investors had concerns about Chicago’s new debt, comparing it to Puerto Rico’s troubled Sales Tax Financing Corp or COFINA bonds, which were included in the U.S. territory’s bankruptcy.

“It’s kind of crazy (Chicago’s bonds) were able to get the ratings they got,” said Dan Solender, a lead portfolio manager at Lord Abbett.

The city has said it will sell $905 billion of bonds through the corporation in January.

Reporting by Karen Pierog; Editing by Matthew Lewis

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