Chicago Public Schools buoyed by two improved rating outlooks

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CHICAGO – Rating pressures further eased Tuesday for Chicago Public Schools as two agencies raised their outlook on the district’s weak credit.

Kroll Bond Rating Agency, the only agency to assign the Chicago Board of Education’s general obligation bonds an investment grade rating, shifted its outlook on the district’s BBB and BBB-minus GO ratings to positive from negative, and made the same outlook revision to the district’s BBB capital improvement tax bonds.

S&P Global Ratings revised its outlook on the district’s B rating to stable from negative.

The action follows a one-notch GO upgrade last week from Fitch Ratings to BB-minus and the assignment of a stable outlook.

Moody’s Investors Service in September revised its outlook on the board’s B3 GO rating to stable from negative after the state approved a package that provided a big boost in CPS funding levels.

“These positive moves from S&P and Kroll are more acknowledgments that CPS is on much stronger financial footing that we were just a few months ago and that we’re on the right track,” the district’s chief executive officer Forrest Claypool said in a statement. “In short, while we still have work to do, CPS has made a tremendous financial turnaround.”

The rating actions come ahead of the Chicago Board of Education’s planned return to the market in mid-November with a roughly $900 million new money and refunding issue. Most would carry a GO pledge with $65 million of new money being issued under the district’s newer capital improvement tax credit that carries an A rating from Fitch.

“The positive outlook reflects KBRA’s assessment of recent reforms that have provided the board with additional state and local resources to re-build reserves, re-establish structural balance and improve liquidity, while reducing reliance on short-term borrowing and nonrecurring sources,” Kroll said in its report.

KBRA added it would closely monitor the district’s financial performance over fiscal 2018. The BBB rating applies to the district’s upcoming issue and its 2016 GOs which were designated special revenue GOs while its previously issued GOs are rated BBB-minus and carry the designation of dedicated alternate revenues.

Both carry the same security features but the rating distinction is based on a legal opinion supplied by CPS and reviewed by KBRA external counsel that pledged property taxes under the alternate revenue structure would likely be treated as special revenues in a Chapter 9 proceeding. The opinion was provided only the 2016 and the upcoming issue.

"The outlook revision is based on our view of the district's higher state aid revenue as a result of the state's new funding formula, and lower pension costs, with the state now picking up more of the employer pension contribution, and the district's ability to extend a higher property tax levy to support the pension contribution,” said S&P analyst Jennifer Boyd.

The district will receive $300 million more annually from the state in operating aid and to cover teachers’ pension contributions under the education package approved over the summer. The state also gave the district authority to levy about $130 million in property taxes annually for pensions. The city has pledged to provide $80 million to cover security costs and help close what had been a $550 million deficit.

The district is still heavily reliant on short-term borrowing to stay afloat but the new funding eases pressure so that the district can trim by $250 billion what had been $1.55 billion in planned cash flow borrowing.

With its near-term crisis receding, the district also drew additional banks to bid on its recent note financings “a positive sign for the district given its reliance on lines of credit to support operating and debt service expenses,” S&P said.

Strains that keep the district in junk territory remain including “extremely weak liquidity and its vulnerability to unexpected variances in its cash flow forecast,” S&P said.

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