CHICAGO – Chicago Public Schools will pay off its nearly $400 million of grant anticipation notes Friday, and has taken out its first two tax-backed short-term financings of the new fiscal year, according to disclosure filings.

The Chicago Board of Education took out two new tranches of tax anticipation notes Thursday, one for $93.5 million and one for $56.5 million. Both are listed as variable-rate paper with coupons of 3.614% and they mature April 2.

The board's fiscal 2017 TANs paid coupons between 4.6% and 5.2% with yields tied to a percentage of LIBOR with an additional spread.

Morgan Stanley is the holder of the notes, said CPS spokeswoman Emily Bittner, who confirmed the interest rates. “CPS expects to close on additional tranches of TANs in coming weeks,” she added.

The short-term debt moves come as long term CPS spreads have "demonstrably tightened relative to the Municipal Market Data's benchmark," MMD's Dan Berger said Friday. With new state and city help in hand, the spread on a 2046 bond from teh board's July sale with a 7% coupon traded this week at a 165 basis point spread to MMD compared to 265 bp a month ago, Berger said.

The district, which relies heavily on short term credit lines, had closed on two costly tranches of grant anticipation notes, one for $275 million and the other for $112 million, on June 19 and June 26, respectively.

The state government, then approaching two years without an enacted budget, was three quarters behind on quarterly categorical block payments to CPS.

Smyser Elementary School, part of the Chicago Public Schools district.
Chicago Public Schools will pay off its fiscal 2017 grant anticipation notes Friday. Yvette Shields

The district turned to the GAN issuance to meet obligations including $467 million it owed on its more than $700 million teacher’s pension contribution in June amid late state grant payments and uncertain aid levels.

Both GAN series mature in March but allowed for early redemption or cancellation as soon as Friday. If they hadn't been redeemed before the end of this year, holders would have been able to swap the GANs for tax anticipation notes which could have impacted the district’s planned $1.55 billion TAN borrowing for the current fiscal year.

The district privately placed both GAN tranches with JPMorgan, a lead provider of the district’s TAN lines, after a competitive bidding process.

When Mayor Rahm Emanuel’s administration announced the district’s planned GAN borrowing, the state government owed the district $467 million.

The district was allowed to leverage up to 85% of the overdue grant amount. General state aid continued to flow in a timely fashion as it was prioritized by the state.

Since the note placements, the state adopted a $36.1 billion budget that allowed for some internal fund transfers to help pay overdue bills. State Comptroller Susana Mendoza has now sped up block grant distribution and the “last payment owed is the June 30 payment,” said Mendoza spokesman Abdon Pallasch.

State leaders also approved a school funding package that provides the district with about $300 million in aid and pension help and the ability to exceed property tax caps by as much as $150 million. The district has not yet set its next levy. The new funding sources have whittled down a $544 million deficit and the city has committed $80 million to cover security costs. The district has not yet amended the previously approved fiscal 2018 budget to reflect the new funding sources or to cover the remaining red ink.

The GANs marked the latest in pricey cash flow borrowings undertaken by the district. The initial rate on the $275 million was set at 6.39%. The initial rate on the $112 million was set at 6.41%. The initial rates were adjusted monthly based on 70% of the London Interbank Offered Rate plus a spread of 550 basis points. The spread was up from 400 basis points on the district’s $1.55 billion of fiscal 2017 tax anticipation note issues. One-year note sales by more fiscally sound borrowers that carried top short term ratings priced at the time below 1%.

Moody’s Investors Service earlier this month revised its outlook on the district’s B3 rating to stable from negative to reflect passage of the new state funding.

“These new revenues should prevent the district's financial position from further deterioration in fiscal 2018. However, liquidity will remain precarious, requiring continued market access for cash flow borrowing to maintain operations,” Moody’s wrote.

The district is redeeming $206.6 million of the first tranche and purchasing for cancellation the remaining $68.4 million with accrued interest of $1.2 million on the canceled notes. The district is redeeming $84.2 million of the second tranche and purchasing for cancellation the remaining $27.8 million with accrued interest of $471,000 on the canceled notes, according to filings by the district and trustee Zions Bank.

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Updated September 29, 2017 at 12:22PM: The story has been updated with information about the district's new tax anticipation notes.