Chicago school district sees path to a $600 million refunding

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CHICAGO – With its near-term fiscal strains eased by an infusion of new annual state funding, Chicago Public Schools plans to return to the market with an up to $600 million general obligation refunding.

“We expect this issuance to refund existing bonds at a lower interest rate. There is no debt restructuring or new money,” said CPS spokesman Michael Passman. A past reliance on scoop-and-toss restructuring that pushed off debt service repayment for near-term budget relief contributed to the junk-rated district’s credit slide and punishing borrowing costs.

“We are still finalizing the structure and timing of the issuance,” Passman added. “The underwriting team has not yet been finalized.”

The Chicago Board of Education signed off on the borrowing authorization at its monthly meeting Wednesday. The bond resolution reports the potential refunding of 2002, 2006, 2008, 2009, and 2013 debt. The earlier maturities are likely callable but later maturities would have to be refunded with taxable bonds because the federal tax legislation adopted late last year eliminated advance refundings.

The junk-rated district pays a steep penalty to borrow but the new state aid and additional city funding buoyed market perception and the district shaved more than 200 basis points off its last sale – a $1.025 billion issue that sold late last year – compared to its $500 million sale in July. The state finalized the new funding later in the summer.

The district is receiving $300 million in new state aid annually from a revised school funding formula and to help cover its pension contributions. The state also gave the district an additional $130 million in tax levy capacity and the city is providing $80 million to help cover public safety costs.

Gov. Bruce Rauner, however, has proposed in his fiscal 2019 budget shifting some state pension contributions for teachers’ pensions to school districts, a move that would cost CPS more than $200 million.

Spreads late last year initially ranged from 230 to 260 basis points to the Municipal Market Data top-rated benchmark before they were repriced by 5 to 20 bp better. That compared to roughly 480 bp spreads seen in the July issue.

The district’s standing with investors has also been helped with its attachment on some GO-alternate revenue bonds backed by general state aid of a post-default intercept provision that would direct aid directly into an escrow.

The district’s short-term borrowing remains costly. It is paying 70% of the three-month London Interbank Offered Rate plus a spread of 330 basis points on the latest tranches – a $203 million issue and a $145 million tranche – that sold Jan. 5 and Feb. 13, respectively. JPMorgan purchased the tax anticipation notes that mature in December 14.

The cost is up from tranches that sold earlier in fiscal 2018 at a rate of 70% of one-month LIBOR plus a spread of 275 basis points. As of March 1, the district had $847 million of TANs outstanding including $247 million that mature April 2.

The district projects ending fiscal 2018 on June 30 with a $250 million cash balance although $950 million of TANs will be outstanding. The district this fiscal year trimmed its reliance on short term borrowing to $1.1 billion from $1.55 billion.

Fitch Ratings last year raised its rating by one notch to BB-minus and assigned a stable outlook. S&P Global Ratings shifted its outlook to stable from negative on its B rating. Moody’s Investors Service rates the district at B3 and revised its outlook to stable from negative.

Kroll Bond Rating Agency, the only rating agency that rates the district in investment-grade territory, revised its outlook to positive on its BBB and BBB-minus ratings.

Market participants say while the new funding provides needed salve for its fiscal pressures, the credit remains distressed and the district faces expense and labor pressures with little additional room to further raise new revenue.

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Speculative grade bonds School bonds Primary bond market Refunding bonds Board of Education of the City of Chicago Illinois