Bloomberg reports that Chicago is set to sell approximately $806 million in municipal bonds this week. This is part of a refinancing effort as Mayor Brandon Johnson races to close a budget gap of nearly $1 billion by the end of the year. The city plans to borrow $679.7 million of sales-tax-backed debt and $126.6 million of general obligation bonds on December 5. The proceeds will be used to refinance outstanding debt and help bridge back-to-back shortfalls.
Investor Concerns and Market Dynamics
During this time, there is a disagreement between Johnson and city council members on how to fill a $982.4 million hole in next year's budget. The mayor proposed a $300 million property-tax increase, which was unanimously rejected by aldermen. Tensions have escalated, and potential investors in the upcoming general obligation bond sale were warned that there is "no assurance" a spending plan will be passed on time. Dan Solender, head of municipal securities at Lord Abbett & Co., notes that the deals will likely require more yield than similarly rated bonds to account for the "noise." Yields on long-dated Chicago bonds are about 127 basis points wider than top-rated benchmark securities, up from around 93 basis points in late August.The bond sale will offer insights into how concerned investors are about Chicago's budget impasse. Ratings companies have already issued warnings of credit downgrades, with both S&P Global Ratings and Kroll Bond Rating Agency placing the city on watch. The city's general obligation bonds are rated BBB+ by S&P, while the sales-tax debt carries a AA- grade.After the city council rejected the proposed property-tax hike, lawmakers are now negotiating piecemeal items such as higher levies on alcohol sales, cloud computing, and garbage fees. The simple fact is that expenses like labor and pension costs have increased, while revenue came in lower than expected.However, the muni market has stabilized since the late October bond rout, and benchmark yields have dropped, making refinancing more attractive. Investors have also favored debt from issuers offering higher yield. An index of BBB-rated state and local government bonds that includes Chicago debt has earned 4.9% this year, topping the 1.9% gain by benchmark AAA munis.Bond buyers will carefully consider the challenges facing Chicago against the backdrop of a strong demand muni market. Investors added $559 million to municipal bond funds in the week ended November 27, following a $1.3 billion inflow the previous week.Eric Kazatsky, senior US municipals strategist for Bloomberg Intelligence, states that any fundamental credit analyst will see through the continued use of one-time measures to balance the budget and recognize the depth of legacy credit concerns. On the other hand, this deal will look cheap compared to other bonds in the market and will likely be multiple times oversubscribed, signaling a false sense of acceptance for the city's fiscal behavior.Chicago, as the third-largest US city, carries heavier debt and pension liabilities than any other large peer. This weighs on its budget in the long term and pressures other spending needs. Although federal pandemic aid temporarily alleviated deficits, that support is now diminishing.In a November 27 statement, the city said, "Chicago's long-term liabilities, particularly our pension obligations, have been a significant fiscal challenge for decades, placing unique pressures on the City's budget. We've focused on structurally sound solutions that tackle the budget deficit while maintaining essential services for residents."Amid the chaotic budget talks, the city's credit rating progress has come to a standstill. The city had achieved a series of gains in recent years and shed its one junk rating from Moody's Ratings in November 2022. Alderman Gilbert Villegas said on Monday, "The administration has put forward a budget that's really focused strictly on revenue generation. It doesn't take into consideration any type of rightsizing of government. To start off with revenue without any cuts is the wrong approach."READ MORE