CHICAGO – The junk-rated Chicago Public Schools, on track to run out of cash next month, will add $120 million to its delayed $1 billion bond sale and dip into a new credit line for another $130 million.

CPS' precarious liquidity position and the long-term toll of relying on borrowing to keep schools running was outlined in a Dec. 11 memorandum from consultant Ernst & Young LLP to schools chief Forrest Claypool.

"By January 2016, it is projected that CPS will completely exhaust its current line of credit and cash resources," according to the memo, which was requested by CPS. "The near-term cash flow shortfall is expected to be addressed by issuing additional debt, thereby further increasing CPS' liabilities and future debt service obligations."

The Chicago Board of Education will vote on the two borrowing items at its meeting Wednesday. They include revisions to a previously approved bond resolution authorizing the board to tap a $1.04 billion of $1.16 billion in borrowing authority approved earlier in the year.

The district will now borrow the full amount when it comes to market in January with a sale that was originally slated for this month.

In addition, the board is being asked to approve borrowing up to $195 million of tax anticipation notes to support a credit line. The board has previously approved tapping $65 million and the district now intends to secure approval to use the remaining $130 million.

"The district's near-term cash outlook is challenging, and under pressure because the state of Illinois continues delaying its payments as a result of the failure to pass a budget," CPS spokeswoman Emily Bittner said. The state is behind on $150 million in block grant funding that was due in September.

The consultants' letter further attributes the current cash crisis to district's ongoing $1 billion structural deficit and the increased burden put on the operating fund to cover capital costs as a result of bond sale's delay.

In addition to its use of credit lines, the district is deferring some large vendor payments to preserve cash, according to the consultants' update. Going forward, the district anticipates tens of millions in savings through administrative cuts under a planned reorganization and an additional $100 million in non-personnel cuts and efficiencies. The savings are targets and not guaranteed due to the difficulty of implementing some changes.

Ernst & Young had previously warned that CPS was on track to exhaust cash over the summer. The district managed in recent months to stay afloat by tapping $700 million of existing lines that total $900 million. They must be repaid with incoming tax collections.

Proceeds of the bond issue will fund $536 million of previously approved capital projects and push off $229 million in debt principal for budget relief. Another $275 million would go to convert floating-rate bonds to fixed and cover the cost of terminating interest-rate swaps now in default due to CPS' credit deterioration. The additional $120 million expected to be approved Wednesday will fund "capital projects for life and safety, mechanical (including boilers) and other additional projects," CPS said.

The bond resolution tacks on another year to the final maturity given the sale's delay to 2016, and replaces departed chief financial officer Ginger Ostro's name on documents with vice president of finance Ronald DeNard. Ostro recently resigned to take a new position. The resolution allows for a range of structuring options including capital appreciation bonds and a private placement.

The Ernst & Young update offers a bleak picture for the coming year noting the "substantial risk" posed to the district's $6.4 billion budget, cash flow position, and credit ratings as it has gambled on $480 million of state pension assistant to balance the books in the current fiscal year. The request has made little headway with state leaders feuding over the state's fiscal 2016 budget, now almost six months overdue. Claypool has warned of dire layoffs if the help isn't realized by February.

"CPS has already been placed on negative credit watch by S&P and there continues to be risk of further negative actions by the agencies absent meaningful progress in addressing CPS' structural deficit," Ernst & Young wrote.

Market concerns over the district's solvency have been further heightened by negative headlines. Earlier this year, chief executive officer Barbara Byrd-Bennett was forced out over a contract scandal that led to her guilty plea to federal corruption charges, and a potential teachers' strike looms as the district seeks to squeeze savings out of its prior contract.

"Given recent events, we believe CPS' future has only grown more clouded – and further, that the school district is extremely poorly positioned to repair the damage," Gurtin Fixed Income said in a recent report.

Moody's Investors Service, Fitch Ratings, and Standard & Poor's all have pushed the board's $6 billion of general obligation debt down to junk. S&P assigns a BB rating and Fitch assigns a BB-plus rating. Both have the rating on negative watch which implies more near-term risks.

Moody's rates the board's debt Ba3 with a negative outlook. The district retains one investment-grade rating, from Kroll Bond Rating Agency, which dropped the credit two notches to BBB-minus over the summer.

The district has paid heavily for both its short-and long-term borrowings this year. The district closed earlier this fall on a $500 million private placement with JPMorgan that's divided into two separate tranches of tax anticipation notes for $250 million each, which will serve as a credit line. JPMorgan is lead manager on the upcoming bond sale.

Both tranches mature in 2016 with one paying 70% of one-month LIBOR plus 2.75%, and the other paying 3.25%.

The top yield of 5.63% on the 25-year maturity in the district's April sale landed 285 basis points over the Municipal Market Data's triple-A benchmark but trading spreads more recently have easily topped 300 basis points.

While Gov. Bruce Rauner has floated Chapter 9 bankruptcy as a potential option for the struggling district, Chicago Mayor Rahm Emanuel and Claypool have dismissed the notion. Illinois law does not permit Chapter 9 filings.

The board's bonds carry a GO pledge but most are further secured by an alternate revenue pledge of state aid. Much of the board's debt is also insured.



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