CHICAGO -- The city of Chicago plans to pound a stake through the heart of its only bond default tomorrow by issuing $102.6 million of current refunding revenue bonds for the Chicago-Calumet Skyway.
Proceeds from the issue will be used to redeem $90.2 million of outstanding skyway bonds that have been in default since 1963. Holders of the defaulted bonds will be paid 101% of principal on July 1 in accordance with the original skyway bond ordinance that dates back to the 1950s. And, the city will lay to rest its only default on a revenue or general obligation bond since at least the 1930s.
Still, given the low investment grade ratings the 30-year refunding bonds received, the skyway's history of default has not yet disappeared. Moody's Investors Service rated them Baa; Standard & Poor's Corp. rated them BBB-minus; and Fitch Investors Service rated them BBB. As of the Friday, Chicago was still exploring insurance for the deal.
Investors considering buying the bonds are not likely to let die their memory of the default. So Chicago officials are attempting to show that conditions have improved on the toll road that failed to support itself from its opening in January 1959.
Chicago built the skyway with proceeds from $88 million of revenue bonds sold in 1955 with an interest rate of 3 3/8% and $13 million of bonds sold in 1957 with an interest rate of 4 3/8%. Insufficient revenues collected on the 7.8-mile toll road, which connects the southeast side of Chicago with the northwest corner of Indiana, caused a default on current interest payments. From 1959 to 1976 the skyway failed to generate enough revenues to make the payments on the $101 million of bonds.
In 1977, the skyway finally began to collect enough money to pay interest on the bonds, and the city caught up with all past-due interest payments by July 1989. Off and on, official considered ideas such as a federal or a state of illinois takeover of the skyway, or even privatizing it, but nothing came of them.
In 1972, bondholders began filing lawsuits against the city in U.S. District Court in Chicago and succeeded in winning some court-ordered toll increases. Still, the city failed to deposit money in the skyway sinking fund to trigger a bond redemption. In 1991, bondholders won a court order forcing Chicago to redeem $10.8 million of bonds through a tender offer.
Over the years, bondholders also charged the city with breaching its fiduciary duty by allowing the default. Earlier this month, attorneys for bondholders agreed to dismiss pending litigation once the bonds are redeemed.
Chicago's defense has been that all the skyway revenues were needed for operation and maintenance. The city fought the toll increases, claiming that higher tolls would reduce the use of the skyway.
"I can't change history," said Walter Knorr, Chicago's comptroller, who began crafting the bond refunding plan late last year in the face of a Jan. 1, 1995, maturity date for the outstanding bonds.
He pointed to "some real busts as far as traffic assumptions" that were made by original planners of the skyway, including not accounting for future parallel expressways in Illinois and Indiana.
Traffic Heats Up
The competing free expressways were built, and skyway traffic fell far short of projections. But over the last five or six years, construction on the competing roadways forced drivers onto the skyway, Knorr said. When the construction was completed, the diverted traffic stayed on the skyway, paid the tolls, and cut 20 minutes in travel time, Knorr said.
Over the last five years, traffic grew 5.1%, while revenues increased 8.8% a year, according to the city's traffic engineer, Wilbur Smith Associates, Inc. The company estimates total revenues to grow 3.2% a year between now an 1998 and continue on an incline through 2008 without any increase in toll rates.
Knorr said the city also made "profound changes in the way skyway is run," including mechanization and internal controls for toll collection.
Chicago has also mapped out a $180 million capital improvement plan that calls for major refurbishing of the toll bridge and for general repairs. The 15-year plan is funded primarily with toll revenues, along with $15 million of federal transportation money and $22 million of existing skyway funds. The city has structured the refunding bonds so that no principal payments will be made until 2012, freeing up toll revenues to pay for the improvements.
"This is a roadway that's been 40 years in existence. Certainly in order to absolutely assure it's got an additional 30 years of life to match the bonds we're talking about, this type of capital maintenance is required," Knorr said.
The city has added some protections for bondholder that weren't standard in the 1950s, including a debt service reserve fund that will be funded with $9 million of bond proceeds, Knorr said.
"We're making very profound pledges with regard to maintaining revenues to cover operation and maintenance and obviously debt service with a healthy coverage factor," he said.
William Corbin Jr., an attorney at Chapman & Cutler, bond counsel on the deal, said the toll covenant is "more specific" than the covenants in the 1950 indentures. Despite its history of fighting toll increases in court, the city has a covenant to keep tolls at a level that generates revenues coverage of 1.2 times debt service.
"The city recognizes its responsibility to maintain revenues to pay for costs," Knorr said. "I think there is flexibility even in the toll structure to increase tolls without a diminution of traffic."
Moody's also required strengthened legal provisions that require any surplus funds to be used only for skyway purposes, and only allow the city to proceed with the capital plan if annual traffic projections indicate coverage will remain 1.2 times debt service on the bonds.
The preliminary structure of the bond issues calls for about $15 million of term bonds that mature in 2015 and about $87 million in term bonds that mature in 2024. PaineWebber Inc. is the bookrunner for the refunding, and Dean Witter Reynolds Inc. is the co-senior manager. Co-managers are M.R. Beal & Co., Chicago Corp., and Reinoso & Co. Knorr said a subsequent issue of about $15 million of possibly parity bonds may be sold in six or seven years for the capital improvements.
Alex Rorke, a first vice president at PaineWebber, said there is "strong institutional interest," mostly from funds, for the bonds.
"They see an investment-grade toll bridge, which has proven its ability to generate revenues," Rorke said. "It's probably the most studied, discussed, debated, photographed, analyzed, and reported-on toll bridge in the country."
"The crux is, how do you issue bonds to bail out a situation that doesn't seem viable," one market participant said. "You would think this would not be an easy issue to market."
Reaching for Yield
"Right now we have a market environment where guys in the Street wouldn't mind reaching for some yield," another market player said. "With the right price, they could get it done. "They will have had to do the right road show -- that's the key."
"The one thing about the skyway is it's still going to be there," another players said. "They might not draw a broad audience, but with the right structure and price, people should buy it."
The administration of Mayor Richard Daley also had to sell the bond refunding to members of the city council. Daley Administration officials told the council that if the outstanding bonds are not redeemed by Jan. 1, a 5% interest rate penalty would kick in, the court would probably appoint a receiver for the skyway, and the city's creditworthiness could be harmed. Although the refunding issue was approved last Wednesday by the council in a 33 to 7 vote, not all of the council members are convinced that refunding the skyway debt is the right thing to do.
"The project has not succeeded in 40 years, and in all probability it's doomed to fail again," said Alderman John Buchanan, a long-time opponent of the skyway, who has characterized the refunding as a bailout for bondholders.
Knorr said it was worth the fight to rescue the "credit integrity of the name of Chicago" by "fixing a problem that could be fixed."
"I don't look at this as us bailing out the skyway. I look at it more like the skyway taking care of itself," he said.