Chicago Schools Pay Price to Get Deal Done

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CHICAGO - Drawn by attractive interest rates, investors Tuesday bought up $300 million of bonds sold by the Chicago Board of Education, which has been dogged by leadership turmoil and questions about its solvency.

The bonds were oversubscribed with more than 100 buyers participating, according to finance team members.

The top yield of 5.63% on a 25-year maturity landed 285 basis points over the Municipal Market Data's triple-A benchmark.

While the board's rating remains in investment grade territory, its yields aren't.

Tuesday's MMD scale Tuesday put a mid-level, triple-B rated credit at a 3.78% yield on a 2039 maturity, underscoring just how severe a penalty the district paid. The Chicago Board of Education is rated between the BBB-minus level and A-minus.

Secondary trades on the board's $6 billion of debt jumped 140 basis points in recent weeks with 10-year paper trading around 250 basis points over MMD and 15 year paper trading at 300 basis points over.

Bookrunning senior manager PNC Capital Markets LLC priced the two series on Tuesday after a delay earlier this month. BMO Capital Markets was co-senior and another 11 firms rounded out the syndicate.

The two tranches offered a C series for $275 million and an E series of $20 million in green bonds. Both carried a general obligation pledge plus an alternate revenue pledge of state aid.

The Series 2015C bonds sold as a split maturity with $100 million maturing in 2035 offering a 5.25% coupon to yield 5.53% and a small piece for $10 million with a premium structure that offered a 6% coupon to yield 5.38%.

A 2039 maturity for $165 million was priced with a 5.25% coupon to yield 5.63%. The majority came with a discount structure with a 95 to 96 dollar price. The numbers tracked closely with initial indications released Monday.

The green bonds were priced as a 2032 bullet maturity with a 5.125% coupon to yield 5.42%.

"We believe the deal is attractive at these spreads, given the discount structure," said Triet Nguyen, co-head of municipal and corporate credit at New Oak.

The deal was the subject of much market chatter Tuesday. According to Markit, CBOE paper was trading slightly cheaper Tuesday ahead of the new issue.

"The 2035 is a discount structure, that typically signifies to me that you got some alternative buyers looking for some pop on the run, so they will try to trade on the headline news," said a Midwestern trader. "The structuring had a fairly deep discount. Only $10 million in the 2035, a little telling on the premium structure, which tells me you only have a few institutional buyers."

The finance team initially planned to offer the bonds earlier this month but delayed the sale to give the market time to digest a series of multi-notch downgrades that triggered swap termination events. The market also was awaiting word from Chicago voters on their choice for mayor in an April 7th runoff. Mayor Rahm Emanuel, who appoints CBOE board members and the chief executive officer, won a second term.

During the delay, new challenges emerged, including Gov. Bruce Rauner's suggestion last week that bankruptcy presented a good option for the financially beleaguered district. Such a bankruptcy is not currently possible in Illinois law.

The district then disclosed a federal probe into a no-bid contract and the role CEO Barbara Byrd-Bennett played in it. The week ended with the announcement that Byrd-Bennett would take a leave of absence and board member Jesse Ruiz would serve as interim CEO.

The headlines socked the value of the district's bonds but Municipal Market Analytics opined that the credit still faces low default risks and benefits from underlying security strength.

The district faces daunting fiscal challenges in a $1.1 billion budget deficit and $9.5 billion of unfunded pension obligations that have driven its credit rating deterioration with no fix in sight.

Moody's on March 6 downgraded Chicago Public Schools two levels to Baa3 and assigned a negative outlook. Ahead of the new sale, the board did not seek a rating from Moody's. Fitch Ratings in March lowered the district's GOs to BBB-minus from A-minus, assigning a negative outlook.

Standard & Poor's lowered the district's rating by two notches to A-minus and assigned a negative outlook. Kroll Bond Rating Agency assigned a first-time rating of BBB-plus with a stable outlook.

"The question that is on everyone's mind is did the Kroll rating do anything? Overall, it has wide spreads but you can really tell by the dollar amount who the buyers are," the Midwestern trader said.

A termination event on its swaps was triggered when both Moody's and Fitch lowered the district below the BBB level. CPS is negotiating with the counterparties to stave off $228 million in payments.

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