Chicago launched a tender offer this week as part of its upcoming Sales Tax Securitization Corp. transaction that will also debut the city’s first social bonds that target seven trackable Chicago Recovery Plan projects.
The tender offer to holders of $2.9 billion of general obligation debt expires Tuesday at 5 p.m. EST, with the acceptance date set for Jan. 19. The city’s STSC would purchase targeted bonds that span tax-exempt and taxable series from 1999, 2003, 2005, 2007, 2008, 2009, 2010, 2011, 2012, 2014, 2015, and 2017 with proceeds of the upcoming issue pricing Jan. 18th and 19th.
RBC Capital Markets, Siebert Williams Shank & Co. LLC, and UBS Financial Services Inc. are serving as the dealer managers for the tender and are lead managers on the STSC transaction. Globic Advisors is the tender agent.
The taxables carry interest rates of between 5.765% and 7.781% and would be purchased at spreads ranging from 141 basis points to 276 bps to the 2-, 3-, 10-, and 30-year Treasury depending on the maturity being tendered. The final prices would be set Jan. 19 based on Treasury rates.
The tax-exempts include current interest and capital appreciation bonds with interest rates ranging from 5% to 6.26%. The tender lays out purchase prices based a percentage of the par amount on the CIBs and based on a percentage of the maturity value on the CABs.
Chicago has seen success in its last two tender/exchange offers. In 2021, the city conducted a tender/exchange offer to holders of $4.3 billion of general obligation and motor fuel tax-backed bonds. The strong results led the city to upsize by about $1 billion to $2.2 billion the refinancing piece of its deal.
Chicago in 2020 conducted its first tender/exchange to holders $1.8 billion of high-interest taxable bonds as part of a $1.5 billion GO/STSC refunding. The $374 million of tendered bonds contributed $40 million to the overall $310 million of savings, providing budgetary relief in 2020 and 2021.
“Each of the last two tenders had strong market reception and participation rates, and a tender allows the city to be more intentional about sculpting our outstanding debt service and callability profile as well as generate savings on bonds without call features,” Chicago Chief Financial Officer Jennie Huang Bennett said. “The city also believes that tenders provide investors with flexibility in their management of their city bond holdings to their own particular needs and provides liquidity in the city’s bonds that supports the city’s primary offerings.”
The STSC, initially set up in 2017 as a bankruptcy remote vehicle to refinance outstanding GO debt at greater savings because of its higher ratings, will offer $155 million of new money bonds notable in that they will carry the city’s first “social” bond designation.
The city will offer a $53 million taxable series and a $104 million tax-exempt tranche under the senior STSC lien. The refunding series to cover any tendered and refunding of GO or STSC bonds would be done under the second lien in a taxable and tax-exempt series.
Proceeds will finance projects laid out in the COVID-19 Chicago Recovery Plan with social and green goals. Kestrel Verifiers provides in the offering statement the independent opinion that the bonds meet the criteria laid out by the International Capital Market Association’s social bond principles.
The city plans an investor presentation and will court retail in addition to institutional investors in structuring and marketing the bonds and target local investors.
The city will fund seven project areas of the $1.2 billion CRP that relies on a mix of borrowing and federal COVID-19 relief from the American Rescue Plan Act.
The city will track outcomes tied to the CRP investments through a program management office. A voluntary reporting agreement on the bonds will annually detail the expenditure of the social bond proceeds and will seek to include social outcomes and impacts.
“The city has had a number of conversations with the top ESG holders in the country and the number one thing we heard from them is that what they are looking for is not just reporting on impacts from the city but that we target these projects specifically so that these impacts can be clearly discussed with their holders,” Bennett said in an interview last month.
“That’s why we picked seven projects specifically that we felt really allowed us to have that more progressive and really deep conversation about impacts so it’s getting away from the overarching concern is the greenwashing over ESG bonds,” Bennett said.
Funds will go toward electrifying the city’s light-duty fleet by 2035, expanding the tree canopy, development of non-congregate housing, development of supporting housing, development of mixed-use housing, vacant lot elimination, and community development grants, according to the offering statement.
The city expects to save $2.5 million annually and reduce greenhouse emissions by 4,000 tons once it converts to an electrified light-duty fleet. The city intends to plant 75,000 trees over the next five years, up from an average of 6,500 annually over the last 10 years.
“The tree equity strategy will prioritize the planting of trees in historically marginalized and underserved communities, equitably conveying ecosystem benefits disproportionately impacted by the climate crisis,” the offering statement reads. The tree canopy aids in removing carbon dioxide from the air and provides natural cooling benefits.
On housing, the city plans to acquire three to six buildings for non-congregate housing use by local shelter operators. The city has closed on one mixed use housing development with plans in the works to acquire or develop 14 others through 2023.
The city is eyeing the sale and redevelopment of 10,000 vacant lots with 4,500 found to be fit for use or sale and plans to remediate the others. The social benefits of this extend to crime reduction. The offering statement cites research that shows reduced gun violence, burglaries, vandalism and other crimes near former vacant lots that were repurposed.
The community grants provide investments to support the redevelopment of residential and commercial properties, energy system upgrades, and other developments with priority given to areas “with a history of disinvestment or limited private investment,” reads the POS.
The STSC heads into the market on a ratings upswing.
The bonds carry a AAA/AA-plus from Kroll Bond Rating Agency, AA/AA-minus from Fitch Ratings and AA-minus on both liens from S&P Global Ratings. STSC bonds are secured by a first lien on the state-collected portion of the city’s home rule sales and use taxes and the local share of the state-wide sales and use taxes that flow directly from the state to the bond trustee.
S&P last month affirmed the ratings on the first and second-lien bonds and the positive outlook. S&P moved the outlook to positive last fall on the city’s GO and STSC credits. The rating is based on priority-lien tax revenue criteria and is constrained due to links to the city where the sales taxes are collected and distributed.
Fitch last month affirmed the second lien’s AA-minus and first lien AA ratings and stable outlook, which followed an October upgrade of the senior lien by one notch. The second lien was left at AA-minus in the October action that came in tandem with an upgrade of the city’s GO rating to BBB from BBB-minus. The GOs and senior lien STSC carry a positive outlook while the junior lien remains stable.
The bankruptcy-remote, statutorily defined nature of the STSC and a bond structure involving a true sale of the pledged sales tax revenues allows for a rating six notches over the city’s GO rating.
Pledged revenue tumbled in 2020 by 10.5% to $639 million due to the pandemic but shot back up in 2021 to 4.8 % over 2019 levels and was at $788 million through Nov. 21, so coverage levels remain strong, Kroll said.
The city expects 2022 STSC revenues will rise by 15.5% to $864 million, according to Fitch.
Bennett said questions from investors on the credit have revolved around the city’s outlook on projections given concerns about a recession. “We are projecting a reduction and tapering back to historic norms” on growth, which is guiding issuance, Bennett said.
“The stable outlook reflects KBRA’s expectation that even under severe economic downturns and other stressful scenarios, the pledged sales tax revenues will remain more than sufficient to meet timely principal and interest requirements on the corporation’s debt,” Kroll said.
The 10-year STSC bond in the city’s December 2021 issue saw a 39 bp spread to the AAA benchmark and was evaluated in November at 111 bps and has narrowed over the last two months to 96 bps, according to Refinitiv-MMD. The 10-year with a 5% coupon in the city’s GO sale last month landed at 4.09 %, a 151-basis point spread to the AAA benchmark.
As of October, the STSC had $2.59 billion of senior lien and $2.02 billion of second lien outstanding.
The STSC sale follows the city’s $533 million GO issue last month that benefitted from the restoration of an investment grade rating from Moody’s Investors Service, which lifted the city to Baa3 from Ba1 in November.