CHICAGO – The Chicago Public Schools stirred up more uncertainty when the junk-rated district yanked a $875 million general obligation bond sale from Wednesday's negotiated offerings, moving it to the day-to-day calendar.
The district's finance officials said the decision was made to give investors more time to digest the deal and the underwriting syndicate time to tinker with an accommodating structure.
Market participants said while some borrowers – especially troubled, high yield credits -- have made a similar 11th-hour decision, they described such a delay after a marketing blitz and release of the pre-marketing scale as a rarity and a clear illustration of the district's deep fiscal distress.
The Chicago Board of Education had intended to sell $795 million of tax-exempt securities and $89 million of taxable paper. JPMorgan is the bookrunner and Barclays is also a senior manager with another 10 firms rounding out the syndicate.
The deal was slated to sell after a fresh round of rating downgrades last week, which also saw the General Assembly's GOP minority leadership announce legislation backed by Gov. Bruce Rauner to put the district under state oversight and put it on a possible path to bankruptcy.
The developments drove up secondary market yields on the district's debt; a pre-marketing wire offered spreads of more than 500 basis points to the Municipal Market Data's top-rated benchmark.
Chicago's chief financial officer, Carole Brown, and CPS finance chief Ronald DeNard sought to stave off speculation about the district's continuing ability to access the market, which is crucial to CPS' ability to stay afloat financially.
"The process just wasn't finished" of finalizing pricing, structure, or terms and of building the order book, Brown said. Finance officials, financial advisors, and underwriters decided to postpone the sale "to give everyone more time to work on this important deal in a somewhat difficult market. We felt it was important to give investors more time to look at credit, structure and terms" with the goal of attracting "deep investor participation."
The two insisted the deal was not "pulled" from the market because an official pricing wire was not released and that it had sufficient order interest to place with buyers at pre-marketing pricing levels distributed Tuesday.
Brown and DeNard said more time was needed to put together a more diverse group of buyers. Brown also sought to portray the move as one that was not unusual especially for a troubled, high-yielding credit. They also stressed that the delay – which they believe will be brief -- won't harm CPS' precarious cash flow situation. The deal's proceeds are to provide several forms of cash relief to help the district stay afloat through fiscal 2016, which closes June 30.
The finance team posted the offering statement and an investor presentation earlier this month and held investor calls last week but had received a request from several potential buyers for additional time to review the deal.
DeNard said the finance team was still fielding questions Wednesday morning and the delay will give it time to provide the answers but insisted that the syndicate "absolutely" had indications of interest at the prices offered in the pre-marketing scale.
"We are still very optimistic that this deal will be sold" and it will now be evaluated on a day-to-day basis," Brown said. The final transaction could change in size and structure based on the delay.
DeNard said the delay won't alter CPS' current fiscal planning or accelerate possible teacher layoffs that the district's chief executive officer, Forrest Claypool, has warned could be coming without $480 million in state help it has requested. DeNard said he does not expect any “material” change in the closing date on the transaction which is scheduled for the week of Feb. 1, according to the investor presentation.
The CPS deal joins another troubled credit on the day-to-day negotiated calendar, a $750 million senior lien revenue bond deal from the Puerto Rico Aqueduct and Sewer Authority. The PRASA sale was put into a holding pattern in August 2015.
The decision was made Wednesday morning and CPS disclosed it while some members of the underwriting syndicate believed the pricing was still on. One banker whose firm was in the syndicate said JPMorgan just didn't have "critical" mass for the deal's book.
The decision fueled market speculation over whether JPMorgan truly had sufficient orders in hand without having to take down a big chunk of the issue, whether there was too little consensus among the syndicate on prices, and whether the city and CPS were just too unnerved by what some called a stunning yield penalty.
Some said the deal should have broken into pieces.
Ahead of the sale, yields on top-shelf municipal bonds were up by as much as three basis points. Several larger deals saw their amounts downsized on Wednesday as the market remained in a tentative mood ahead of the Federal Open Market Committee's decision on interest rates. While no one expected the Fed to hike rates at the meeting -- and it did not -- market observers were looking for any hints as to what action the Fed might take at its March meeting.
A preliminary scale marketing the bonds ahead of the formal pricing offered a 20-year maturity at a 7.70 % yield, 524 basis points over the Municipal Market Data's triple-A benchmark and 429 basis points more than what a triple-B borrower pays. The deal carries single-B-level junk ratings from Fitch Ratings and Standard & Poor's but a BBB rating from Kroll Bond Rating Agency. Moody's Investors Service also rates the bonds in the single-B category but was not asked to rate the deal.
The 25-year and final 28-year maturities were offering a preliminary yield of 7.75%, 506 basis points and 502 basis points, respectively, over MMD's AAA. Both were more than 400 basis points over a triple-B credit. The preliminary price on the taxable, 17-year maturity offered a yield of 9.75% with a coupon of 9.50%.
Much of the deal's proceeds are to ease cash flow pressures. About $393 million will reimburse the district for money already spent on capital projects and $86 million will retire short-term debt used to cover swap termination payments.
The district expects to borrow against that line this spring.
Another $206 million represents a scoop-and-toss restructuring in which the district borrows to pay off maturing bonds. About $135 million will refund variable-rate debt that is being shifted to a fixed rate; the deal capitalizes $46 million of interest and folds in $8.8 million of issuance costs.
Last week, one board maturity traded at 449 basis points to top-rated MMD scale, shooting up from 397 basis points before the Illinois Republicans' announcement, according to data from Markit. Another trade showed a jump in a 2041 maturity of 61 basis points to a spread of 446 basis points. CPS bonds had been trading at a 350 to 375 basis point spread before the announcement.
The district's $300 million sale last spring saw a top yield of 5.63% on a 25-year maturity that was 285 basis points over top-rated MMD.
