Chicago priced $229.265 million of second lien wastewater transmission revenue bonds Thursday in a refunding deal that saw spreads tighten from the last time the issuer was in the market.
This is the second wastewater deal since
Loop Capital Markets priced the bonds Thursday for Chicago with 5s of 1/2025 at 3.59% (+23 basis points to Bloomberg’s BVAL triple-A scale), 5s of 2029 at 2.97% (+32), 5s of 2034 at 3.11% (+50), 5s of 2039 at 3.53% (+44) and 5s of 2044 at 3.96% (+48), callable Jan. 1, 2034.
Bloomberg News
The Series 2024A refunding bonds will refund the city’s Series 2012 and Series 2014 second lien bonds.
The issuer was last in the market in May 2023 with $452.575 million second lien bonds. In that deal, the 10-year maturity with a 5% coupon saw spreads of +59 to BVAL and its 20-year with a 5.25% coupon +75 basis points to BVAL.
A spokesperson for the city’s finance department said Chicago decided to pursue this deal now because the Series 2012 and Series 2014 bonds are both currently callable and the city estimates the savings will be about $22.2 million on a present-value basis and $31.1 million on a total cash-flow basis.
In 2023, the city modernized its bond indentures in ways that affected the flow of funds. Key changes included the adoption of a new cash reserve policy to improve liquidity, the finance department spokesperson said.
“Those changes were viewed favorably by rating agencies,” she said, noting that Fitch also upgraded the city’s wastewater credit, to A-plus from A-minus, last year.
The RSI Group and Baker Tilly are co-municipal advisors. ArentFox Schiff LLP and Zuber Lawler LLP are co-bond counsel.
The bonds are secured by sewer system revenue and securities held by the trustee under the indenture, including any amounts on deposit in second lien construction accounts, according to the
Chicago has about $18.7 million outstanding of senior lien wastewater transmission revenue bonds. It has $1.9 billion outstanding of second lien wastewater transmission revenue bonds and $423 million outstanding of Illinois Environmental Protection Agency loans.
Fitch Ratings has assigned the 2024A refunding bonds a
The wastewater bond and system ratings reflect a “strong financial profile within the framework of very strong revenue defensibility and very strong operating risk profile,” Fitch said in its report. Supporting those judgments are the system’s low operating cost burden and life cycle ratio, its healthy rate flexibility, “stable” demographic trends and the wastewater system’s position as an essential service provider, Fitch said.
The rating agency noted that while the wastewater system’s leverage was “very low” in fiscal 2022 (9.9x), it is expected to reach 12.5x in the next five years if the planned capital spending is fully carried out.
“We projected leverage to increase to 12.0x over the next five years per our base case scenario last month,” said Kristen Reifsnyder, a director at Fitch Ratings. “With capital spending anticipated to be notably higher, leverage sustained above 12.0x would likely pressure the rating.”
Reifsnyder noted a five-year annual customer growth rate of 0.3% as of fiscal 2022 and a decrease in Chicago’s unemployment rate since 2020, both factors in Fitch’s judgment that the customer base is “diverse and stable.”
But “factors we’re keeping an eye on include any deterioration in the city’s credit quality and the aforementioned leverage staying above 12.0x longer term, assuming stability of the revenue defensibility and operating risk assessments,” she added.
KBRA had a slightly different take on the system’s leverage, saying in its rating report that the system already has “high leverage” and pointing to fiscal 2022’s debt-to-plant ratio of 62.9%.
KBRA assigns the Series 2024A refunding bonds a
“Current rates provide for satisfactory debt service coverage, robust system liquidity and necessary ongoing investment in the system,” KBRA said in its rating report.
It said the stable outlook stems from KBRA’s view that the system will be able to maintain debt service coverage above indenture requirements. The rating agency also believes the system will manage to handle the operating cost pressures that come from an aging system and flat utilization rates.
Among the system’s credit challenges, KBRA also noted the “lack of a debt service reserve fund and a relatively weak (1.1x) rate covenant.”
S&P assigns the Series 2024A refunding bonds a
“We note, however, that unrestricted cash and investments for fiscal 2022 dropped significantly, partly a planned decrease but partly also due to additional capital spending,” S&P said in its report. On the other hand: “We also note the significant cash flow that net revenue after debt service provides to support the ongoing needs of the wastewater system.”
Scott Garrigan, director and lead analyst at S&P, said the sewer system’s high leverage “demonstrates the city’s reliance on debt financing which we believe they have the current financial capacity to support.”
He added, “While higher leverage increases debt service carrying costs, we view positively the city’s commitment to ongoing system reinvestment and maintenance.”
S&P also pointed to a new pension methodology that impacts costs for the city’s utility funds, which Garrigan said the city will need to recover through ongoing rate increases.
“Overall, balancing the efforts to reduce the unfunded liability with additional related costs is currently credit neutral,” he said. “However, if pension contributions significantly escalate we will need to evaluate the impact it has on overall financial performance for the sewer utility.”
As of Dec. 31, 2022, the wastewater system had $164 million of liquidity and rate stabilization funds, or 430 days’ cash on hand.