The Chicago Board of Education went to market this week with nearly $1.1 billion of refunding bonds in its largest-ever municipal transaction.
The deal comes as trading spreads on its largely junk-rated bonds have widened and the school district faces a litany of challenges, among them management turnover; an ongoing argument with the city over who will shoulder a disputed pension payment going forward; and a new, generous contract with the Chicago Teachers Union.
BofA Securities on Tuesday priced for the Board of Education of the City of Chicago $1.094 billion of unlimited tax general obligation refunding bonds to yield from 4.27% for 2030 maturities with a 5.25% coupon to 5.7% for a 2045 maturity callable in 2035.
Ahead of the deal, KBRA issued a one-notch downgrade for Chicago Public Schools debt.
Bonds lacking a legal opinion from the board stating that the property taxes securing them should be treated as "special revenues" under Chapter 9 of the U.S. Bankruptcy Code, such as the bonds priced this week, were cut to BBB-minus from BBB. Bonds with such an opinion were downgraded to BBB from BBB-plus. KBRA kept its outlook on all the CPS bonds at negative.
The downgrades reflect KBRA's view that the refunding deal "is effectively borrowing to balance its FY 2026 operating budget," the rating agency said.
S&P Global Ratings rates the bonds BB-plus with a stable outlook.
Fitch Ratings assigns the district an issuer rating and unlimited tax general obligation bond rating of BB-plus with a negative outlook after a revision from stable in September.
Moody's Ratings assigns an issuer and GO rating of Ba1. The outlook is positive.
"Orders exceeding $2.3B from 55 different investor accounts were received on the transaction," a CPS spokesperson said in an emailed statement. "The proceeds of the bonds were used to refinance and tender existing outstanding bonds that carried higher interest rates versus current market conditions." The deal did not increase debt service payments in any future year, the statement said.
The district's
"For a publicly traded school district, it's a pretty wide spread," said Howard Cure, partner and director of municipal bond research at Evercore Wealth Management. "I don't think the demand was great even in a pretty light week for the market."
Cure said that based on the pricing data he'd seen, it looked like the 10-year was pricing at 470, about 200 basis points over the triple-A scale.
"They didn't have to make any changes to the scale, so I guess they priced it right," he said.
Lisa Washburn, chief credit officer and managing director at Municipal Market Analytics, said the district's spreads have widened recently.
"CPS faces numerous fiscal challenges marked by high and rising operational costs, declining enrollment, structural budget imbalance, high pension costs, a lack of reserves, rising debt, federal funding uncertainty … to name a few," she said by email.
Cure noted that the district is currently searching for a new CEO and CFO. And as enrollment looks poised to continue a downward trend, he said, the district is not making any changes to its teacher workforce or building count.
The children of immigrants have been a big factor in stabilizing enrollment, so the Trump administration's targeting of Chicago for immigration raids may also impact the district.
Cure said he is further leery of the transition to a fully elected school board — it is currently a hybrid of elected and appointed members — which will happen in January 2027.
"You have a state that may not be as generous with them going forward; they've gone through all their federal monies," he said. "Do they have the discipline to make cuts? … The rating agencies aren't necessarily thrilled with them."
The district's challenges relating to the end of federal pandemic relief aid are compounded by the fact that it put some of those one-time dollars toward recurring operations.
At the same time, there is a noticeable lack of commitment from the state to increase its assistance to CPS, MMA's Washburn said.
The one-time tax increment financing payments that are plugging the district's budget gap are not a reliable way to balance the budget, she said. The district should instead look to permanent funding solutions, right-sizing its operations and reducing its reliance on high-cost measures.
"To increase confidence in the credit it would be beneficial for the district to work on solidifying its fiscal relationships with the city and the state, with the goal of enhancing certainty and ideally increasing funding support from the state," Washburn said.
"A multi-year fiscal plan with multiple scenarios and contingency plans if needed could provide greater transparency and serve as a fiscal roadmap," she added. "Rationalizing operations and making difficult decisions to improve fiscal stability are also important."
Jessica Lerner contributed reporting.
