Philadelphia school district tests market after shift to local control

The junk-rated Philadelphia School District is set to hit the bond market for the first time since its November decision to end nearly two decades of state control.

Pennsylvania’s largest public school system is slated to issue $251.8 million of general obligation bonds in a negotiated offering through lead managers Bank of America Merrill Lynch geared toward funding capital projects.

Underlying junk ratings are enhanced by a state intercept program.

The state-dominated School Reform Commission, which has governed the district since December 2001, voted in November to return to a locally appointed school board by July 1, 2018.

The deal was rated Ba2 by Moody’s Investors Service, which assigns a positive outlook, and BB-minus by Fitch Ratings, which assigns a stable outlook.

The bonds also received enhanced ratings of A2 from Moody’s, with a stable outlook, and A-plus with a negative outlook from Fitch under a Pennsylvania intercept program that provides state aid to bondholders in the event that the district can’t make debt service payments.

“The district's options to achieve ongoing fiscal balance are limited absent external assistance, but a consistent history of support from other levels of government implies the district will continue to meet its financial obligations with external assistance as necessary,” said Fitch analyst Eric Kim in a March 15 report.

Moody’s analyst Nicolanne Serrano said in a March 14 report that the switch to mayoral-controlled school board and the stabilization of new charter school approvals will help the district continue on a path toward more sound budgeting practices. Serrano also noted that Philadelphia Mayor Jim Kenney’s $4.7 billion budget proposal would help generate essential new revenue for the school system, which is on pace to run a $900 million deficit by the 2023 fiscal year.

The district is expected to have $3.2 billion of long-term debt outstanding after Thursday’s issuance, according to Moody’s.

“Our outlook for the underlying credit quality of the district is positive given our expectation of continued charter stabilization and management's solid governance over school operations and finances,” said Serrano in her report. “The positive outlook also reflects our expectation that finances will be maintained within the range of structural balance going forward.”

Moody’s upgraded the district one notch in September from Ba3 citing three straight years of surpluses. The district, which has no local taxing powers and relies on city and state officials for funding sources, has secured $58 million in new annual revenue from Philadelphia’s now permanent cigarette tax, according to an official statement for the deal.

The bonds are scheduled to mature in 2043 with serial maturities through 2038. Phoenix Capital Partners is the financial advisor for the transaction and Eckert Seamans is bond counsel.