“The numbers suggest they are on the brink of losing market access,” said Richard Ciccarone, president of Merritt Research Services.

CHICAGO – Battered by negative headlines about its solvency, labor troubles, and a state takeover threat, the Chicago Board of Education returned to the market Wednesday after a one-week delay to price a scaled-down deal that offered a hefty high yield of 8.50%.

The district initially planned last week to offer $875 million of general obligation paper, including $795 million in a tax-exempt tranche and $80 million of taxable securities.

The final offering run by JPMorgan was sized at $725 million and came entirely as tax-exempt. A preliminary pricing wire had cut the size to $675 million but it was revised later in the day.

CPS appeared to have dropped the taxable piece while the yield on the deal's long bond shot up by 75 basis points over what CPS had been aiming for last week.

The issue also offered a bigger discount than seen in the initial pricing talk ahead of last week's sale date and some maturities were shifted while the 10-year call feature remained intact.

"Borrowing money was never a decision that we took lightly and though some wanted our efforts to fail, CPS needed to move forward in order to keep our doors open so we could educate our children," Ron DeNard, the CPS vice president of finance, said in a statement. "Along with the tough cuts announced yesterday and earlier this year, the sale of these bonds will produce sufficient proceeds to mitigate our cash flow challenges through the end of the fiscal year."

DeNard's comments appeared directed at Gov. Bruce Rauner, whose talk over the last week of a state takeover and possible bankruptcy for the district rattled the market, even though Democrats who control the General Assembly have called the legislative effort dead on arrival.

Several market participants said the fact the deal got done is an accomplishment for the beleaguered district, but its market access came at a dramatic cost. While some thought traditional municipal buyers might shy away, several sources said it was their participation that drove the sale.

"The numbers suggest they are on the brink of losing market access," said Richard Ciccarone, president of Merritt Research Services. "The numbers suggest there is a lot of doubt about whether CPS can find a method and means to solve its financial problems. Can this be a catalyst to bring together what looks like a polarized political situation?"

The sale shows there are enough buyers out there "with confidence that their turnaround plan can work," said Lyle Fitterer, senior portfolio manager at Wells Capital Management. The downside for CPS is "they want to be compensated" for that support. Fitterer added that no yield is sufficient if a buyer doesn't have some belief the district can remain afloat.

"This buys some time from a liquidity perspective," he said.

Triet Nguyen, a managing director at NewOak Capital LLC, said: "The structure is apparently designed to appeal to performance-oriented trading accounts, not income-oriented buy-and-hold accounts, as evidenced by the deep original issue discount on the 2044 maturity. Of course, the low dollar price also means CPS could not maximize the proceeds from the bond sale, given its weak negotiating position."

The preliminary pricing wire was not released until the afternoon, signaling JPMorgan's cautious approach. It also reflected CPS' sensitivity to questions over its market access after the decision to postpone the sale last week as the underwriting team struggled to raise enough orders to clear the deal.

One buyside source said the deal was 1 times subscribed with orders lined up ahead of the pricing and that CPS’ supplement to its offering statement outlining the strength of the tax pledge in a possible bankruptcy “had a big effect.”

Yields on the tax-exempt came at 7.75% with a 7% coupon on $60 million in a 2026 maturity with a price of $94.559. The remaining $665 million came in a 2044 maturity at a yield of 8.50% with a coupon of 7% and at a deeply discounted price of $83.939. The latter maturity was upsized to $665 million from $615 million.

The 8.50% yield on the 28-year bond landed 580 basis points over the Municipal Market Data's top-rated benchmark for a similar maturity and nearly 500 basis points over a BBB credit. The yield on the 10-year maturity landed 607 basis points over a similar top-rate maturity and 515 basis points over a BBB credit.

Fitch Ratings, Standard & Poor's, and Moody's Investors Service have the district deep in speculative-grade territory with single-B level ratings. The deal received a BBB rating from Kroll Bond Rating Agency.

CPS has seen its yield penalties skyrocket from its offering last spring when they landed at a spread of just under 300 basis points to the top-rated benchmark. In the interim, CPS has seen its ratings fall deep into junk territory. It has warned of a cash flow crisis and increasingly relied on short-term lines to stay afloat while its pleas for $480 million in extra state help to balance its current budget go unanswered.

The pre-marketing wire on the structure last week – JPMorgan never released a formal wire – offered 25-year and 28-year maturities with preliminary yields of 7.75%, 506 basis points and 502 basis points, respectively, over MMD's AAA. They offered respective coupons of 7.25% and 7%. A 20-year maturity was being marketed then with a preliminary yield of 7.70% and a 7.5% coupon. The long bond was to come at a discounted price of $91.388. The preliminary price on the taxable, 17-year maturity, completely axed from this week's deal, offered a yield of 9.75% with a coupon of 9.50%.

The deep discount could provide some downside protection in terms of dollar price in the event of a restructuring, Nguyen said.

Both Ciccarone and Fitterer said CPS' push to emphasize a legal opinion that pledged tax revenues could meet the definition of a special revenue definition and survive in Chapter 9 proceedings may have helped the deal with some investors. CPS inserted the legal opinion in a supplement to its offering statement late Tuesday.

"It was a defensive mechanism designed to provide a cushion" for buyers, Ciccarone said. "They did a good job of laying out the statutory lien and special revenue implications."

Fitterer said it probably helped although the legal position is untested.

While the deal was downsized, CPS said it is sufficient to provide most of the budget and liquidity relief it sought.

About $393 million was to reimburse the district for money already spent on capital projects and $86 million to retire short-term debt used to cover swap termination payments. The district was planning to borrow against that short-term line this spring.

Another $206 million represents a scoop-and-toss restructuring in which the district borrows to pay off maturing bonds, trimming the size of a deposit due to its debt service fund on Feb. 15.

With the downsized deal, the district postponed plans to use about $135 million of proceeds to refund variable-rate debt that is being shifted to a fixed rate, and will postpone reimbursements for swap terminations.

CPS said completing the deal allows it restructure some bonds as planned and meet its February deposit and reimburse itself for capital expenditures.

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