CHICAGO — Chicago Public Schools returns to the market in the coming week with more than $1 billion of cash flow notes, general obligations, and revenue-backed borrowing.
The district, which sells through its board of education, will bring $86 million of capital improvement bonds on Tuesday and $763 million of general obligation bonds on Wednesday. The GOs are rated junk by two rating agencies and low investment grade by a third. The CIT bonds are rated between BBB and the single A category.
JPMorgan is running the books on both transactions. PFM Financial Advisors LLC and Public Alternative Advisors LLC are advisors. Katten Muchin Rosenman LLP and Taft Stettinius & Hollister LLP are bond counsel.
The district will then take bids on $200 million of tax anticipation notes Thursday. The TANs are unrated and mature March 29. Bids are capped at 5%. PFM and Columbia Capital Management are advising the district. Ice Miller LLP and Pugh Jones & Johnson PC are bond counsel on the notes.
The district’s ratings have risen thanks to $900 million in new, long-term funding measures enacted over the last two years providing new state aid and authorizing various capital and pension levies. Borrowing remains costly, but the improved fiscal picture has trimmed yield penalties on recent sales and district officials are hoping that momentum continues.
“CPS continues to improve its fiscal stability,” the district’s chief financial officer, Jennie Bennett, said in a recorded investor presentation. “Ultimately CPS is a new credit from years past and we are seeing those results come to fruition.”
The district is rebuilding its drained balances and reserves, closing out the last fiscal year with a $276 million fund balance and a $188 million balance is expected when the books are closed on fiscal 2019 June 30.
Still, the district projects “a negative cash position for the majority of fiscal year 2019,” the offering statement says.
Short-term borrowing peaked at an authorized level of $1.55 billion in outstanding notes before dropping last year to $1.1 billion. The board this year authorized up to $1.25 billion, but the district currently anticipates needing no more than $994 million outstanding at any time.
GO
The GO deal will sell in two series, one for $450 million to refinance 2008 and 2009 debt, with some pieces of the deal expected to carry insurance from Assured Guaranty, and a $313 million new money series.
Bondholders get several layers of protection on the GO. The alternate revenue structure benefits from a pledge of state aid, while the new money series gets a further pledge of personal property replacement taxes. The deal carries the district’s default intercept mechanism that sends pledged revenue directly to the trustee in the event of a default or bankruptcy filing although state law doesn’t currently allow for Chapter 9.
Higher state aid levels have improved debt service coverage ratios and there’s an automatic tax levy that is put in place upon issuance under the state’s alternate revenue pledge structure. The district typically uses pledged revenues like state aid to repay the bonds and then abates the tax levy. If the levy were to be triggered, tax collections would go directly to the trustee.
It’s a “double-barreled, double-intercept” credit, Bennett said.
Ahead of the deal, Fitch Ratings affirmed the district’s BB-minus rating and positive outlook and S&P Global Ratings affirmed its B-plus rating and stable outlook. Kroll assigns a ratings of BBB and BBB-minus to various tranches of the board’s debt with a positive outlook. Moody’s Investors Service rates the GO at a speculative grade but was not asked to rate the new deal.
The rating is “based on our view of the board's extremely weak cash position, which was negative through almost all of fiscal 2018 and is projected to be mostly negative in fiscal 2019, albeit with some improvement and its reliance on cash-flow borrowing to support operating and debt service expenses,” said S&P Global analyst Blake Yocom.
“The positive outlook reflects CBOE's progress toward structural balance as evidenced by the inclusion of improved school funding in the state's fiscal 2018 and 2019 budgets, the projected restoration of positive reserves for fiscal 2018 and an improved liquidity position leading to lower levels of cash flow borrowing,” Fitch wrote.
CIT
The new money CIT bonds mature between 2033 and 2046 and are secured by a special capital improvement tax levy approved by the city council. The district received $48 million in 2016 from the then-new levy, $51 million in 2017 and $56 million in 2018.
“The board will leverage the incremental $5 million in tax year 2018” in the upcoming issuance, Bennett said.
Fitch, in a new report, affirmed its A rating and stable outlook. Kroll affirmed its rating of BBB-plus and positive outlook in a report earlier this month.
“The 'A' rating on the dedicated tax bonds reflects the strong resilience of the pledged tax security without regard to the issuer's general creditworthiness,” Fitch wrote.
The rating is distinct from the district’s issuer default/GO rating “due to Fitch's assessment that the pledged revenues meet the definition of 'special revenues' under the U.S. Bankruptcy Code and therefore, bondholders are legally insulated from any operating risk of the board,” Fitch said.
Kroll said in its report the general credit quality of the board weighs on the CIT credit profile.
“While recent revenue actions and reforms by the state have increased the likelihood of the board restoring structural budgetary balance…KBRA believes that the board still faces significant ongoing fiscal challenges,” analysts wrote. “KBRA’s recognition of these challenges and our view on the overall credit profile of the board tempers our credit assessment of the CIT Bonds to the point where the Board’s general obligation credit becomes a factor in the rating of the CIT Bonds.”
NOTES
The note issue marks the district’s second use of a competitive sale. Late last month it received eight bids on its $200 million sale, the first of the fiscal year and first competitive issue in recent memory. The paper was purchased by JPMorgan at a 2.45% interest rate.
Though the rate remains high for a security maturing at the end of March, it marks a sharp improvement from the rates paid previous sales as the district grappled with a budget and liquidity crisis. The district paid a rate of about 4.8 % on TANs sold in the last fiscal year.
The district’s notes are limited obligations of the district secured solely by pledged tax collections. The district’s levy for the year is $2.46 billion, doled out in two installments.
Based on cash flow projections, the district expects fresh TAN issues through February, all of which would be repaid with the first installment levy. CPS may issue additional TANs in April through July repaid with second installment taxes.
The district lays out its ongoing strains in the “bondholders’ risk” section listing wage and salary, pension and debt costs and ongoing liquidity pressures as well as exposure to the city and state’s fiscal struggles.
The district’s 2019 pension contribution is $809 million. The teachers’ fund is at a 50.1% funded ratio with $10.9 billion of unfunded liabilities.
The offering statement does not list under the litigation section any lawsuits directly linked to a sexual abuse reporting scandal or the potential for future fiscal liabilities or lawsuits.
The offering statement says the district faces no new cases since its last financial results were published for fiscal 2017, in which an adverse result is “possible or reasonably possible and where the board’s liability, or any individual matter and net of insurance, is greater than $10 million.”
Some on the buy side believe such lawsuits loom and could pose a future burden for the district.
The board “has available to it a tort liability tax levy to pay tort judgments and settlements” and it is “unlimited as to rate but subject to limitations on the annual growth in property tax extensions of the board” imposed by state caps, the offering statement’s litigation section says.
