Junk-rated Chicago school system seeks $1 billion bond sales

[October 25, 2016]  CHICAGO (Reuters) - The junk-rated Chicago Public Schools will be selling up to $1 billion of new and refunding bonds pending approval of its governing board later this week.

The nation's third-largest public school system wants to issue up to $840 million of general obligation bonds to fund capital improvements using a $45 million property tax hike approved by the Chicago City Council last year. The district also seeks to refund up to $160 million of older bonds, according to the agenda released on Monday for the Chicago Board of Education's Wednesday meeting.

The school board, appointed by Chicago Mayor Rahm Emanuel, gave initial approval in August to the sale of $945 million of new money bonds.

CPS is struggling with escalating pension payments that will jump to about $720 million this fiscal year from $676 million in fiscal 2016, as well as drained reserves and debt dependency. As a result, the district's credit ratings have fallen deeper into the junk category, most recently with a downgrade from Moody's Investors Service.

The muni market has demanded fat yields for CPS debt. Even a private sale of $150 million of 30-year GO bonds by CPS in July to J.P. Morgan came at a 7.25 percent yield, which was 513 basis points over the yield for AAA-rated bonds on Municipal Market Data's (MMD) benchmark scale.

In the most recent secondary market trading of the bonds, the spread narrowed to a still-sizeable 374 basis points over the scale, according to MMD.

Meanwhile, uncertainties lurk for CPS. A proposed four-year contract that averted a teachers' strike earlier this month must still be ratified by the entire Chicago Teachers Union. New money for classrooms under the tentative deal will flow from surplus property taxes generated by city economic development districts, a nonrecurring revenue source.

The school district's $5.46 billion operating budget includes a one-time, $215 million state of Illinois pension contribution that is contingent on the legislature's passage of major state-wide pension reforms by January.

The district on Friday released enrollment figures showing 381,349 students, a drop of nearly 11,000 from the 2015-16 school year.

(Reporting by Karen Pierog; Editing by Matthew Lewis)

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