CHICAGO --The junk-rated Chicago Board of Education plans to price its delayed deal as soon as this week in the wake of a new downgrade and a setback in negotiations on a new teachers' contract.
On the morning of last Wednesday's scheduled pricing, Chicago Public Schools pulled the $875 million sale from that day's negotiated offerings and moved the issue to the day-to-day calendar. The underwriting syndicate — led by JPMorgan — was struggling to build the order book based on a pre-marketing pricing scale after recent downgrades and announcement of a state GOP-led effort that could put the district on a path to Chapter 9, market sources said.
City and CPS finance officials insisted they could have gotten the deal done Wednesday but said several potential investors asked for more time to review the deal. Officials said the delay also gives them the opportunity to cater the structure to buyers' interests.
Mayor Rahm Emanuel was in New York City Monday for "a series of annual meetings with financial institutions about [Chicago's] strengthening economic condition," his administration said. An Emanuel spokeswoman said the trip had nothing to do with the timing of the CPS deal.
Emanuel, deputy mayor Steve Koch and Chief Financial Officer Carole Brown "are meeting with all four rating agencies today in New York City to update each agency on the recent financial reforms the city implemented as part of 2016 budget and the ongoing phase-out of the unsustainable financial practices of the past. This was a long planned trip," said finance department spokeswoman Molly Poppe.
Late Friday, Moody's Investors Service downgraded the school board's GO rating one level to B2 from B1 and assigned a negative outlook. The rating agency had put the board on review for a downgrade in December and the action ends that review. The outlook is negative. Moody's rates $5.5 billion of the board's $6.1 billion of debt and was not asked to rate the new deal.
Moody's concerns over the district's cash flow crisis drove the fresh knock.
"The downgrade reflects the district's increasingly precarious liquidity position and acute need for market access to support ongoing operations," Moody's wrote. "Current liquidity provides minimal cushion for unforeseen budgetary variances."
Without near-term budgetary relief through new revenue or cuts, the district could deplete available cash by the end of the fiscal year on June 30, Moody's warns. "If liquidity is exhausted, the district may be forced to seek additional external liquidity support at a steep cost," Moody's analysts said.
Proceeds of the sale would provide budget relief on several fronts; reimbursing the district for cash spent on capital projects, repaying a short-term line used to cover swap termination payments thereby freeing up the line for use later in the fiscal year, and paying off some near-term debt maturities.
"Moody's appears more focused on media reports and political gamesmanship than the substantive steps that CPS is taking to address its serious financial challenges," CPS said in a statement. "Despite their ill-timed action, CPS continues to have market access and the delay in pricing has allowed additional investors to gain comfort in the transaction and absorb the news of progress on a potential agreement with the Chicago Teachers Union."
That was the statement put out Friday when CPS thought it had a breakthrough in negotiations.
Such hopes were dashed Monday, when a special CTU bargaining team committee rejected a contract offer that the teachers' union labeled on Friday "a serious offer." A potential teachers' strike has been cited by rating agencies as a negative factor.
"The basic framework calls for economic concessions in exchange for enforceable protections of education quality and job security," said CTU President Karen Lewis said on Friday.
Published reports have said the district's coverage of 7% of the 9% teachers' pension contribution would be phased out by next year in the four-year contract while teachers would receive raises of 2.75% to 3% over the second, third, and fourth year with additional step increases for experience and education. The district's plans to help balance its next budget rely on $170 million in savings by ending its coverage of the pension contribution.
The CTU said Monday afternoon after the vote that the contract was rejected because "it does not address the difficult conditions in the schools, the lack of services to our neediest students or address the long-term fiscal crisis that threatens to gut public education in the city. Moreover, educators do not believe the Board will honor its promises because it has lacked the will to join with parents, students, community and others in identifying existing revenue solutions that can stabilize the district."
The Moody's downgrade also incorporates the district's structurally imbalanced fiscal 2016 budget that relies on a request for $480 million of additional state funding that has gone nowhere with state leaders. The school district is also grappling with a $1 billion deficit looming in fiscal 2017 that begins July 1. Its rating pressures include high debt levels and rising pension contributions as it grapples with $9 billion of unfunded liabilities.
The district said it intends to sell the bonds this week.
As the finance team works to attract more investors, officials are stressing the double-barreled security of a property tax levy layered over a pledge of state aid under an alternate revenue pledge structure. The board is promoting an opinion from special legal counsel that the structure could withstand a potential Chapter 9 filing. The board, however, in its offering statement makes clear that the legal opinion has not been tested in bankruptcy court.
The legal review garnered a BBB rating for the bonds from Kroll Bond Rating Agency, one notch higher than its BBB-minus rating the board's other similarly structured debt. Kroll said the opinion from the board's special counsel outlines that under the alternate revenue bond structure the pledge of the general state aid revenues and pledged taxes provide a statutory lien on both streams of revenue.
Kroll, after also consulting with its own external counsel, believes the structure likely means bondholders would be "treated as secured creditors in a bankruptcy proceeding of the board, independently of whether there is a special revenues lien on pledged taxes," the rating report reads.
"In addition, the automatic stay arising upon the filing of the bankruptcy petition does not stay the application of those special revenues to payment of the bonds secured by those special revenues," so "regularly scheduled payments of principal and interest to bondholders likely would continue," Kroll adds.
KBRA also cited an Illinois appellate court that upheld the alternate revenue structure and tax pledge in a 2002 case involving a hospital that had closed. Several buyside representatives say they are wary of untested legal opinions.
