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 The Chicago Board of Education managed to sell only $725 million
of an originally planned $795.5 million of tax-exempt bonds, and
yields on the deal topped out at 8.5 percent, a massive premium
relative to higher-rated debt sold in the U.S. municipal bond market
and a clear indication of investors’ view of the depths of the
district’s fiscal woes.
Wednesday’s sale came a week after the school system had to pull the
deal in its first attempt at an offering amid worry by investors
that the district could end up in bankruptcy.
The nation's third-largest public school system has become dependent
on borrowing to bolster its budget, which is sinking under
escalating pension payments, despite credit ratings that have
dropped into the "junk" level.
The 8.5 percent yield for bonds due in 2044 with a 7 percent coupon
was slightly below the 8.727 yield for 21-year bonds in the
municipal market's last big junk bond sale - a $3.5 billion Puerto
Rico issue in March 2014.
 But the school district's so-called credit spread over the market's
benchmark triple-A scale was wider at 580 basis points versus 514
basis points for Puerto Rico in 2014, indicating investors are
demanding a stiffer penalty from the Chicago Public Schools (CPS).
"It’s a Puerto-Rico grade yield and clearly signals that the
district is on an unsustainable path," said Matt Fabian, a partner
at Municipal Market Analytics.
In contrast, a top-rated issuer's debt would yield only around 2.70
percent on Wednesday, according to Municipal Market Data's benchmark
scale.
CPS officials said bond proceeds will reimburse the district's
operating fund for out-of-pocket capital costs and free up $206
million by pushing out debt service payments. Portions of the deal
to restructure variable-rate debt to fixed rate and finance-related
interest rate swap termination fees were postponed.
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"Along with the tough cuts announced yesterday and earlier this
year, the sale of these bonds will produce sufficient proceeds to
mitigate our cash flow challenges through the end of the fiscal
year," said CPS Senior Vice President of Finance Ron DeNard in a
statement.
Late on Tuesday, the district tried to assure prospective investors
that revenue pledged to pay off the debt could continue to flow to
them should the school district end up in bankruptcy court in the
unlikely event the Democratic-controlled Illinois legislature would
pass a Republican-sponsored bill permitting the move.
Republican Governor Bruce Rauner on Wednesday condemned the
district's second attempt at borrowing, but denied trying to
sabotage the system’s bond issue by publicly advocating bankruptcy
for CPS.
“The numbers don’t lie,” he told reporters. “CPS has been a
financial disaster for years. The balance sheet is stunningly bad.
Now they’re looking at borrowing more money to cover operations."
(Editing by Grant McCool and Matthew Lewis)
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