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Chicago School Deal to Price Wednesday

CHICAGO – Chicago Public Schools said it will price its delayed $875 million bond sale Wednesday, amid heightened acrimony with its teachers union and a renewed state takeover threat.

CPS Chief Executive Officer Forrest Claypool announced the new pricing plan during a news conference to announce $100 million in mid-year spending cuts.

"We're going back to the bond market tomorrow to raise the necessary resources to restore the financial stability of the district. We have good momentum with investors," Claypool said Tuesday.

Bond proceeds will restructure existing debt for budget relief, pay off a piece of short term borrowing use to terminate swaps and reimburse the district for capital spending and shift floating-rate paper to a fixed rate.

The move followed the Chicago Teachers Union's rejection of a four-year contract offer Monday. Claypool also said the district would put an end to its coverage of 7% of the teachers' 9% pension contribution to achieve $130 million in savings.

Claypool had touted the contract as a means to stave off cuts and help the district manage through the fiscal year and beyond.

Gov. Bruce Rauner amplified his threat of a state takeover of CPS Tuesday.

Rauner said Tuesday during a news conference on a separate matter that the union's rejection is a wakeup call for Mayor Rahm Emanuel and taxpayers.

"The teachers union in Chicago has had complete control. They've been calling all the shots for decades and it's the reason the system there is…so broke," he said, adding that CPS mismanagement is also to blame.

Rauner backs GOP legislation that would allow for the same oversight the state now can impose on all other school districts and separate legislation that would provide a path to Chapter 9 bankruptcy. The state lacks a general Chapter 9 statute.

"We need the ability to have bankruptcy be an option is all else fails," he said.

Rauner said he's ordered the State Board of Education to identify potential interim superintendent candidates and to examine if CPS meets the existing takeover criteria.

"The state is going to be ready to step in and take action," Rauner said.

"I thought we'd already addressed this," Senate President Jon Cullerton, D-Chicago, said in a statement. "The law doesn't allow him to do that. So it's not going to happen."

Rauner's previous support for legislation that would allow CPS to file Chapter 9 rattled the market and contributed to junk-rated CPS' struggle to drum up sufficient investor interest in the sale ahead of its initial planned sale date last week. The legislature's Democratic majorities called the takeover legislation dead on arrival.

Democrats Tuesday reiterated their position that the takeover threat is hollow and won't fly with their majorities.

Several market participants said the day's events only served to amplify the headwinds facing the deal.

"A 'no' vote from your union in front of the deal does not inspire confidence with investors that CPS achieve its financial goals," said Brian Battle, director of trading at Performance Trust Capital Partners.

Bookrunner JPMorgan had not released a pricing schedule, structure, or pre-marketing wire by late Tuesday. Several market participants said they would have expected to see one if the sale was being readied for Wednesday.

Battle said the lack of any deal information especially since the finance team said they were looking at structural and term changes to accommodate potential investors suggests that CPS and its underwriting team have put together a sufficient order book. He stressed that little about the deal is usual.

"They must be pretty confident," he said of the potential orders. "Everything about this deal is unusual" for the municipal market given the size of the junk-rated sale, the negative headlines over the teachers' contract, downgrades, the takeover threat, and cash flow crisis.

The budget cuts escalate pressure on the union to compromise in ongoing negotiations.

"We would be thrilled to rescind it if we get a deal…we really believe the contract we've put into place is the foundation of an agreement," Claypool said of the cuts.

Claypool said the district is committed to negotiations but must cut costs now and suggested that the action would send "a very strong signal" that "we are going to right the ship" ahead of the bond sale.

At their own news conference, union officials warned the pension payment cut could lead to a possible strike and CTU president Karen Lewis said the union "would not be bullied" and called the CPS announcement the "latest act of war."

Union vice president Jesse Sharkey said the mid-year cuts were an "atrocity to education" that would "hurt our schools."

On one point they agreed -- that Rauner should offer state fiscal help instead of takeover threats Democratic leaders have vowed to block. Claypool called the state's funding system "discriminatory."

Lewis called Rauner's comments the "ravings of a madman" and union officials questioned Rauner's ability to manage the district when he can't get a budget passed.

The CTU blamed its rejection of the district's four- year contract offer on what it called the pact's failure to address the district's fiscal instability and a lack of trust over the district's ability to honor some of the contract terms.

The vote Monday by the district's 40-member bargaining committee sets the clock ticking on a final stage of negotiations that could lead to a potential strike in mid to late May if an agreement is not brokered.

CPS had touted late last week progress on reaching a tentative agreement and Lewis had made what was viewed as positive remarks about the district's proposal being a "serious offer."

Municipal Market Analytics, in a commentary published Monday before the failed vote, warned that the district's delayed sale translates into a "seriously higher" risk of impairment although payment default is not imminent.

"At issue remains the district's pending 2/15 deposit with its bond trustee and how, exactly, that payment will be funded. Although the district had long planned to use the proceeds of a new bond issue, it will likely now find the capital markets increasingly circumspect about advancing additional funds," MMA said.

The district reported the February payment as being $260 million but the size depends on its scoop and toss restructuring of $206 million in the pending bond sale.

CPS faces a tough road with investors.

"Note that investors in today's liquidity starved markets remain highly conscious of a new offering's 'support' or the perceived breadth of demand from other investors after a bond clears the primary market," MMA wrote. "Without demonstrating sufficient demand for the new bond's par, never mind an over‐subscription, CPS is now in the unenviable position of bringing exactly the kind of bond investors prefer to avoid."

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