Chicago pulls tax-exempt part of bond deal

Chicago pulled about $292 million of tax-exempt bonds from an $800 million general obligation bond deal that priced Tuesday, saying it expects to price the postponed bonds at an unspecified date based on market conditions.

About $511.9 million of Chicago taxable bonds priced Tuesday, acting CFO Steven Mahr said in an emailed statement, adding they met with "a receptive market."

"The transaction generated more than $2 billion of orders from more than 50 investors, resulting in greater than 4 times oversubscription at the end of the order period," Mahr said. "The strong investor interest ultimately enabled the city to lower bond yields."

The city plans GOs in the second and third quarters, although, the timing "could be accelerated or delayed, at the discretion of the city," he said.

The delayed bond sale unfolded against the backdrop of turmoil in the Middle East, but "I don't think the muni market has moved that much" as a result of the hostilities, said Howard Cure, partner and director of municipal bond research for Evercore Wealth Management. "Rates have gone up, but not that dramatically ? Treasuries might have shifted, but I don't think it's really translated to much in the muni market yet."

The proceeds of the bond deal included funding firefighter back pay and police misconduct settlements, Cure noted. And because that money was necessary to balance Chicago's 2026 budget, the city may not have had the luxury of waiting to sell the taxable component, he said.

"They had to do that from a budgetary perspective," he said. "So almost regardless of the market, that had to go through."

"We are not seeing anything in our data to suggest that there's been a big surge in municipal market volatility," said Justin Marlowe, research professor at the University of Chicago's Harris School of Public Policy and director of the Center for Municipal Finance. "We're not seeing anything to suggest that market technicals alone would drive a massive widening of spreads for any municipal issuer."

At the same time, "if you have the luxury of waiting, then it makes sense to wait right now," he added.

"The city is walking a tightrope ... and I can understand the desire to not have the market confuse wider spreads due to technicals with souring investor sentiment due to Chicago's weakening fundamentals," he said. "They must have been concerned that the market would misread that signal."

Marlowe pointed to Municipal Securities Rulemaking Board data from Refinitiv that showed some of Chicago's secondary market trades on Wednesday were between 180 to 200 basis points wide of Treasuries (for the five-year maturity). A few trades were 205 basis points wide of Treasuries, he said.

"If we go back to during the real turbulent period when the pension crisis had really taken hold ? circa 2016, when they were downgraded to below investment-grade ? at that time, the tax-exempts were trading at 220 basis points wide to the MMD," Marlowe said. "Their more recent taxable GOs, before these recent downgrades, were 140 to Treasuries.

"I think the takeaway from that is the pricing on the taxables reflects investors pricing in risks that we have not seen in recent taxable GO transactions," he said. "We're not yet back to below investment-grade spreads, but this pricing is closer to those below investment-grade spreads than the recent history of Chicago's pricings. ? I can imagine that if they saw similar spreads on the tax-exempt side, they had good reason to wait."

While market volatility may delay some deals, said Mohammed Murad, head of municipal credit research at PT Asset Management, "I think muni credit at this time may be somewhat insulated from the (Iran) conflict as most of the revenue backing muni bonds is generated locally, providing some level of resiliency in our sector.

"In Chicago's case, I think the Iran conflict may be compounding what may already be perceived as a lower-quality credit following recent agency downgrades (and) S&P's latest outlook revision," he said by email.

The fact that Chicago didn't have the luxury of waiting on the taxable component "is a statement in and of itself," Marlowe said. "This will definitely spark a lot of conversation in the coming weeks."

Broader economic conditions generally have a bigger impact on weaker credits, Cure noted. There's a flight to quality.

"You do worry (about what) the market will take from the pricing of the taxable and the delay on the tax-exempt," Marlowe said. "It could send a signal about Chicago's cash position, about the durability of its current financial position, and I don't think that that's an unreasonable conclusion to draw from this."