Chicago Public Schools brings a new narrative to its bond sales pitch
CHICAGO – Junk-rated Chicago Public Schools is billing itself as a “different credit” as it heads into the market with more than $900 million of debt but the image is a hard sell for investors.
The district has avoided a near-term financial crisis but analysts and the buyside still see cloudy long-term prospects.
The district’s finance team is pressing its credit message through investor presentations and meetings in Boston and New York City, boosted by positive rating actions and a much improved balance sheet thanks to an infusion of new, recurring state and tax help.
The new state funding formulas approved over the summer have fundamentally shifted the funding framework for the board and “will allow for long term financial sustainability,” Ronald DeNard, CPS’ senior vice president of finance, said in a recorded investor presentation. “CPS is a different credit than it was just a few months ago.”
Market participants say the district’s punishing spread penalties will ease, but the GO credit remains distressed. Three rating agencies assign junk ratings to the district’s general obligation ratings, and CPS still needs short-term borrowing to manage through the school year.
Long-term prospects bear the weight of expense and labor pressures with little additional room to further raise new revenue after the city and state came through with added funding.
“In the short-term it’s a way better story. They have more state funding and the bonds will do better because the metrics are definitely better but in the long term I don’t think the story has changed much at all,” said Brian Battle, director of trading at Performance Trust Capital Partners.
“The evaluation that CPS is an improved credit might be a premature,” because long-term considerations weigh heavily on a credit profile, Battle added, saying the buyside would like to see long term capital and budget planning from the district.
Another trader said the new state help would definitely draw some buyers to the GO paper, but that only goes so far for a junk-rated credit.
Concern about the fate of private activity bonds and advance refundings in the various versions of the Republican tax bills could help the deal if buyers view future overall issuance as becoming more scarce, Battle said.
The district has seen its secondary market spreads narrow by about 100 basis points with the added state funding in hand. The district paid a top rate of 6.25% on its inaugural investment grade rated capital improvement tax issue last year, and its unrated July GO sale paid yields in the low to mid-7% range.
The district will sell mid-week $65 million of dedicated capital improvement tax levy bonds and $857 million of unlimited tax GOs.
In the GO deal, one series for $360 million and another $81 million will refund floating rate debt that currently carries a 9% rate. The district believes it can shave $175 million over long-term interest costs.
Two other series for $22 million and $168 million will refund debt for savings and $225 million series will generate new money and cover capitalized interest.
The GOs are rated BB-minus and stable by Fitch Ratings after a one-notch Oct. 27 upgrade.
Kroll Bond Rating Agency assigns a BBB rating, and raised its outlook to positive in October. S&P Global Ratings assigns a B rating, and boosted its outlook to stable in October. Moody’s Investors Service was not asked to rate the bonds but rates prior issues in the single B category.
The CIT issue will generate new money, cover capitalized interest, and fund a reserve. The CIT bonds carry an A rating and stable outlook from Fitch and a BBB rating and positive outlook from Kroll.
Portions of the GO issuance will benefit from a post-default intercept provision previously added to the district’s GO-alternate revenue bonds with general state aid pledged as the alternate revenue source. General state aid now flows through an escrow before going to CPS and it would be frozen and directed to bondholders in the event of a default or bankruptcy filing.
The bond offering statement includes a legal opinion that pledged property taxes under the alternate revenue structure would likely be treated as special revenues in a Chapter 9 proceeding. The CIT has a similar opinion from counsel.
JPMorgan and Barclays are the lead managers.
DeNard and Chief Financial Officer Jennie Bennett highlight in the presentation the elimination of a $1.1 billion gap over the last two years. The district has cut expenses by $200 million. It received approval last year to levy a $250 million property tax for pensions and received some additional state aid.
This year, the state’s overhaul of funding formulas raised annual funding by about $300 million and the state signed off on a special property tax levy that allows the district to raise $130 million for pension payments.
The increased funding in the new state package coverage levels on pledged general state aid to GOs to a 2.4 times coverage ratio from 1.5 times. Provisions in the package that hold the district’s aid harmless for enrollment losses will help with long term planning.
The new funding has eased short-term borrowing needs and interest rate penalties. The district will reduce $1.55 billion of planned fiscal 2018 tax anticipation note borrowing by $250 million. It has paid a rate of 3.6% on TAN issues issued over the last month compared to rates of 4.6% and 5.2% last year.
The district also has seen the number of banks willing to participate in TAN purchases to five this fiscal year from three last year.
The district in September repaid nearly $400 million grant anticipation note borrowing that carried a more than 6% rate and is leaving the door open to issuing up to $240 million of GANs this year.
If the state is timely in its distribution of a $180 million payment due late in the fiscal year, the district said it could close the books on fiscal 2018 with a $178 million fund balance instead of a negative $2 million balance.
PFM Financial Advisors and Acacia Financial Group are advising the district. Katten Muchin Rosenman LLP and Cotillas & Associates are co-bond counsel.