The Bond Buyer 40
Chicago’s $1.3 billion deal Sales Tax Securitization Corp., tentatively scheduled to price Wednesday, was moved to the day-today calendar, according to deal participants. Bookrunner Loop Capital Markets cited “market conditions.”
Proceeds of the deal will go to refund higher interest cost general obligation bonds, so the city is seeking to meet its targeted savings levels – both for budgetary relief and net present value savings – making the deal’s value especially subject to prevailing rates.
Municipals were weaker on Municipal Market Data’s AAA benchmark scale, which showed the yield on the 10-year muni general obligation rising three basis points while the yield on 30-year muni maturity gained four basis points.Treasury bonds were stronger as stocks traded lower.
“Recent market fluctuations resulted in the STSC’s decision to postpone the bond offering until the market normalizes,” said Chicago Finance Dept. spokeswoman Kristen Cabanban.
“We will continue to monitor the market and will bring the offering when conditions are most favorable to achieving the greatest savings for taxpayers.”
Several market participants said other factors posed headwinds for the city. They included both a downgrade of the bonds last week and a downgrade of the state’s sales-tax backed Build Illinois bonds late Tuesday, both due to revised criteria published Oct. 22. The two credits are structurally very different, with the state’s falling under the category of traditional revenue bonds and the city’s representing a true sale of the pledged revenue to special bankruptcy-remote entity, but the fresh headline that the market was only beginning to digest was especially damaging.
One trader said a pre-pricing wire on Tuesday put one of the 2053 term bonds at a roughly 80 basis point spread with a 5% coupon to the MMD benchmark.
“It was a number of elements ... I don’t think it was any one thing,” a New York trader said Wednesday. “Overall, being priced into a weak market factored in, and I think people were spooked by the S&P downgrade,” he said. “We heard some investors wanted cheaper levels, and I think when some people heard about S&P reassessing the sales tax bonds they found that scary.”
The deal’s size and its taxable portion were also concerns in today’s market climate, the trader said.
With the taxable portion unfamiliar to cross over buyers, he said, “it was not something up their alley.”
In addition, he said the track record of previous Chicago securitization deals may have given issuers pause, especially in a weaker market Wednesday.”This was not a deal the market was licking its chops for,” he said. “Prior deals have not been easy. To come with a large deal in a tough market makes it even more challenging.”
Aside from the postponement of the Chicago deal, the trader said there are a lot of cross-currents in the market, including the anticipation of Friday’s unemployment numbers and next week’s midterm elections.
Chicago had been eyeing Halloween as the pricing date, chief financial officer Carole Brown earlier this month considered putting off the sale as rates fluctuated and supply grew.
The finance team decided last week to move forward and on Thursday doubled the size to $1.3 billion from $665 million in an effort to wrap up the up to $3 billion of securitization borrowing authorized by the city council for refunding purposes before Mayor Rahm Emanuel leaves office in May.
Municipal bonds were weaker on Wednesday, according to a late read of the MBIS benchmark scale.
Benchmark muni yields rose as much as one basis point in the one- to 30-year maturities.High-grade munis were also weaker, with yields calculated on MBIS’ AAA scale rising as much as one basis points across the curve.