STUMP » Articles » Chicago Bonds Watch: There's One Born Every Minute » 25 May 2015, 18:58

Where Stu & MP spout off about everything.

Chicago Bonds Watch: There's One Born Every Minute  


25 May 2015, 18:58

Classic PR guy PT Barnum would be impressed. He may not have said or written the classic line, but he knew how to value a sucker.

So some people are so yield-hungry that they’re considering buying Chicago’s next bond offering:

Junk-rated Chicago to test bond market
by Robin Wigglesworth in New York and Neil Munshi in Chicago

Chicago is this week expected to return to the bond market for the first time since the city was downgraded to junk by Moody’s, with the yields on offer now high enough to attract international investor attention to the normally insular US municipal debt market.

The third-biggest US city was expected to issue bonds earlier this month, but the plans were delayed by Moody’s decision to slash Chicago’s rating by two notches to Ba1, after an Illinois Supreme Court ruling curtailed options on dealing with a yawning $20bn pension deficit.


Municipal bonds enjoy domestic tax exemptions and are therefore usually solely the preserve of US investors, but the potential returns of Chicago’s new $423m offering have sparked the interest of international investors even without the benefits of tax breaks, according to several analysts.

“I’m already getting calls from international investors about it,” said Mikhail Foux, a muni bond analyst at Barclays. “Chicago should be an interesting opportunity for many investors.”

a fool and his money….

I’m sure those who are wanting to ride the rollercoaster of seeing whether they’ll get a 99% whack at principal love the excitement.

Guy Davidson, head of municipal finance at AllianceBernstein, said the asset manager is still considering whether to invest in Chicago’s upcoming debt sale, “but if we decide to participate we realise it’s going to be a noisy ride”.

You enjoy that ride, y’all.

I’m swimming in data people have been sending my way, so until we find out what the Chicago bond offering does, I’m going to be doing some slice-and-dice this week of data I already have — mainly generally Illinois data, not necessarily Chicago alone.

Just as an FYI: I cannot promise to do an analysis of any data set sent my way — the post you saw where I did some Illinois state plan development took me a while to compile data sources, and not only getting calculations done. I like to think about the numbers for a while before opining.

And remember, I’m not a pension actuary. My experience is annuities, life insurance, and reinsurance. And lots and lots of math. Sometimes I don’t have a handle on “official” numbers, because I do not know all the “adjustments” made. So I might not be able to interpret officially reported numbers.

But if you’ve got a data source on public pensions, I’d love to hear about it! Email me at or message my twitter handle @meepbobeep — there are other ways to reach me as well, but those two are probably the best.

ADDITIONAL: Schwab warns muni investors:

Chicago’s New Junk Bond Rating: Implications for Muni Markets

By Cooper J. Howard and Rob Williams
- May 20, 2015

Key Points

-On May 12, Moody’s downgraded the rating of Chicago’s general obligation bonds to below investment grade, citing the city’s unfunded pension liabilities.

-The downgrade to sub-investment grade is a significant threshold for a city as large and economically diverse as Chicago.

-Other city or state bonds may be affected by the heightened attention the rating agencies are paying to unfunded pension plans.

Pension plans receive more scrutiny

Unfunded pension obligations have prompted multiple downgrades recently. Citing “heavy pension exposure” in part, Moody’s downgraded Illinois (A3), Connecticut (Aa3), Kentucky (Aa2), New Jersey (A2), Hawaii (Aa2), and Pennsylvania (Aa3) over the last two years.

Monitoring pension funding can be challenging, especially for individuals. Issuer disclosures, such as financial statements or recent rating reports, can provide more information. A history of underfunding retirement pension costs is usually a red flag. The non-partisan Pew Institute has published reports recently on both state and city funding levels that can help investors research which municipalities have underfunded pension systems.

What to do now

If you are concerned about pension funding for Chicago or other municipal issuers, we suggest that you:

Diversify by issuer and state. We recommend owning more than 10 individual issuers, with no more than 10% exposure to a single issuer, for a diversified muni portfolio. Diversification helps limit credit risk.

Consider munis less affected by pensions. Munis legally backed by a dedicated tax pledge, such as a sales tax, and not otherwise tied to a government, do not fund pension plans.

Revenue-backed bonds with ratings AA or higher or that are not sponsored by cities or states are unlikely to be as affected by pension funding problems.

Thanks to Seeking Alpha for pointing that out.

Compilation of Chicago posts.

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