Chicago, The Puerto Rico Of The Plains, Goes The “Bowie Bond” Route (Selling Off Rights To Receive Sales-tax Revenue)

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Chicago is truly “the Puerto Rico of The Plains.” Deep, deep in debt (declining population, rising expenditures).

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In a frantic move to raise their bond rating, Chicago is doing what the late David Bowie did back in 1997: he securitized current and future royalties from recordings (Bowie Bonds had an interest rate of 7.9% and a life of 10 years. The Bowie bonds were purchased by Prudential Insurance for $55 million). So now Chicago is sellling off their sales-tax revenues.

(Bloomberg) -By Martin Z. Braun- Chicago’s public pension debt is $36 billion and growing, it’s facing $550 million in budget deficits over the next three years and this summer the state had to bail out a school system that was flirting with insolvency.

Yet next month, the nation’s third-largest city — whose bonds were downgraded to junk by Moody’s Investors Service two years ago — will start selling as much as $3 billion of debt that another rating company considers as safe as U.S. Treasuries.

That’s because Chicago is selling off its right to receive sales-tax revenue from Illinois to a separate public corporation, which will issue new bonds backed by those funds, a structure called securitization. Because bondholders will be insulated from the city’s finances and have a legal claim to the sales-tax money, Fitch Ratings deems the bonds AAA.

But Chicago’s sale comes as many cities face pressure from deeply underfunded pensions and opting for bankruptcy has lost some of its taint after a handful of governments did so after last decade’s recession, though Illinois municipalities aren’t allowed to take that step.
Chicago was extended the power to securitize its sales-tax payment by Illinois lawmakers this year. Paying off higher cost debt by issuing the new bonds will save Chicago almost $100 million in 2018.

Chicago’s new bondholders will have a first claim to more than 90 percent of the approximately $715 million of sales-tax revenue collected each year, according to a presentation to Chicago’s aldermen. The state, which collects sales taxes, will send the revenue directly to the bond trustee. Any excess revenue will go to the city. 

NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) has assigned an AAA long-term rating to Chicago’s Sales Tax Securitization Corporation’s Sales Tax Securitization Bonds Series 2017 A and Taxable Series 2017B.

Here is S&P’s summary.

Yes, there is a whole lot of municipal taxation in Chicago.

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Chicago is now the David Bowie of cities, in addition to being The Puerto Rico of The Plains.

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