CHICAGO - The Chicago Board of Education plans to return to the market on April 21 with a second phase of a planned borrowing that was delayed after a stinging round of downgrades and because of headline risks over the April 7 mayoral runoff election.
The timing of the second phase of borrowing is also being driven by Chicago's plans to swap nearly about $360 million of floating rate paper to a fixed-rate structure to drop bank support during the week of April 13, market sources said.
The board, which issues on behalf of the Chicago Public Schools, completed the sale of two floating note tranches, each for about $89 million, to refund variable-rate paper on March 24.
The move allowed the district to shed bank credit risk attached to the paper because the new structure features a soft put. With one of the floating rate note tranches, a swap attached to the original debt is being transferred to the new notes. The terms of the swap with Royal Bank of Canada include a payable rate of 3.82% and a receivable rate of 70 % of the London Interbank Offered Rate. The district would have been forced to cover a $16 million negative valuation to terminate the swap.
The district paid a steep penalty for its credit woes in the 4.02% rate demanded by investors. It was driven up after recent downgrades triggered swap termination events for the district. The board had initially planned to return the week of March 30 to sell about $370 million, but held off as it sought to update its offering statement and conduct investor outreach following a series of multi-notch downgrades that triggered the swap termination events, market sources said.
Market participants said the district was wise to delay given investor attention on the April 7 runoff between incumbent Mayor Rahm Emanuel and challenger Jesus "Chuy" Garcia, a Cook County board commissioner. The mayor appoints school board members, holding sway over key school decisions.
School officials outline in an investor presentation the most recent hits, highlight the bonds' strong alternate revenue pledge of state aid on top of a general obligation pledge, and its liquidity should it be called up on to cover swap terminations.
"CPS continues to negotiate with swap counterparties to renegotiate certain provisions of the swap agreements," CPS debt manager Walter Stock said in an updated presentation. The termination event was triggered when both Moody's Investors Service and Fitch Ratings lowered the district's GO bonds below the BBB level to Baa3 and BBB-minus respectively.
The district's 10 interest rate swaps on a notional amount of $1.1 billion of paper carry a current negative valuation of $228 million. The district's liquidity stems from a debt service stabilization fund with an unrestricted balance of $174 million, an expected fiscal 2015 ending balance of $227 million, $211 million available in revolving lines of credit, and $500 million in a revolving tax anticipation note line, Stock said.
The board appears to have tinkered with the remaining pieces of its sale as it no longer includes a refunding of 2004 bonds and new-money put bonds are included in a fixed-rate series. The board will sell $276 million of fixed-rate, new money bonds maturing between 2032 to 2039 and $20 million of fixed-rate green bonds maturing in 2032. CPS is privately placing $4.3 million of qualified zone academy bonds.
The senior managers are PNC Capital Markets LLC and BMO Capital Markets with another 11 firms rounding out the syndicate.
Moody's on March 6 downgraded the board's $6 billion of GOs two levels to Baa3 and assigned a negative outlook. Ahead of the new sale, the board did not seek a rating from Moody's. It sought fresh reviews from Fitch Ratings and Standard & Poor's and a new rating from Kroll Bond Rating Agency.
Fitch on March 20 lowered the district's GOs to BBB-minus from A-minus, assigning a negative outlook. Standard & Poor's lowered the district's rating by two notches to A-minus and assigned a negative outlook. Kroll assigned a first-time rating of BBB-plus with a stable outlook.
"The downgrade reflects the limited progress the Chicago Public Schools has made in addressing a structural budget gap approximating 20% of spending for the upcoming fiscal year," Fitch wrote.
With $9.5 billion of unfunded pension obligations, the administration of schools' chief executive officer Barbara Byrd-Bennett must tackle a rising pension payment that will hit $700 million in the next budget, driving up a looming deficit to $1.1 billion. The district closed past gaps through debt restructuring and the use of reserves and other one-time maneuvers. It has limited revenue raising ability as it bumps up against state imposed property tax caps. It has already cut spending and closed schools.