CHICAGO — Moody’s Investors Service and Standard & Poor’s have revised their outlooks on the Chicago Board of Education’s bonds to negative. They cited escalating financial challenges as the district prepares to sell $418 million of new money on Wednesday and a $243 million refunding to restructure debt next week.
Moody’s on Friday affirmed the district’s Aa2 general obligation rating and assigned a negative outlook. Standard & Poor’s late Thursday affirmed its AA-minus and assigned a negative outlook to the upcoming sale and $4.9 billion of outstanding debt.
Their actions followed Fitch Ratings’ downgrade of one level to A-plus with a stable outlook last week.
The board on Wednesday will sell $418 million of new-money debt that includes $257 million of taxable qualified school construction bonds, $151 million of taxable Build America Bonds, and $10 million of tax-exempt bonds.
The board next week will sell $170 million of tax-exempt refunding bonds and an additional $73 million of taxable refunding bonds in a restructuring that will extend debt maturities to provide debt-service relief in fiscal 2011 and 2012.
The restructuring will help allow the district to largely keep intact its $190 million fund balance that serves as a liquidity cushion and informal reserve.
The district has also established a $500 million line of credit to provide liquidity if needed.
Chicago Public Schools’ $6.5 billion fiscal 2011 budget originally called for drawing down the reserve account but that plan was dropped in favor of the restructuring.
Siebert Brandford Shank & Co. is senior manager on the BAB piece, Loop Capital Markets LLC is senior manager on the QSCBs. Morgan Stanley is senior manager on the refunding.
Moody’s blamed its negative view on ongoing state grant delays and the difficulty the district faces in making additional cuts “in light of mandated services and a strong teachers’ union.” The district was owed $236 million by the state when it closed out fiscal 2010 on June 30. The district will receive the funds by the end of the year, but ongoing state budget struggles mean 2011 grants likely will be delayed.
Moody’s also noted that it generally considers debt restructuring for near-term budget relief “as somewhat of an imprudent practice.”
Standard & Poor’s attributed its action to state payment delays and concerns over the school system’s financial flexibility.
“The revision reflects our expectation that the board will be hard-pressed to maintain balanced operations and adequate reserves in the face of the state’s ongoing fiscal problems and the board’s limited ability to increase revenues,” Standard & Poor’s analyst John Kenward wrote in a report.
Analysts said the rating is supported by a substantial and diverse tax base and weakened but still satisfactory finances.