The Chicago Public Schools “pulled” a planned issuance of $875 million in bonds yesterday, throwing into question the school system’s ability to issue further long-term debt and jeopardizing its ability to get through a major cash crunch in the coming weeks.
Yesterday morning, the school system planned to offer the debt at an exorbitantly high rate of 7.7%, but then pulled the deal before finalizing pricing, typically the last step before a sale. In a call with financial reporters yesterday afternoon, City of ChicagoCFO Carole Brown said, “CPS did not pull its deal, the deal has not failed…[We] had numerous discussions with investors and they are making evaluations of the credit on structure, terms and price. They asked for more time.”
However, Brown’s claim did not go over well on the call with financial press, at one point resulting in a shouting match on the call between Brown, CPS Vice President of Finance Ron DeNard and reporters over whether or not it should be termed a “pulled” deal or a “failed” deal.
“We’re still on course to issue CPS’ bonds,” said Brown yesterday. “The fact that the CPS bond deal has not sold today has not altered the funding plan.”
CPS is now planning to go “day-to-day” on the sale, which means that it will keep the terms open until underwriters can assemble a large enough group of buyers to complete a sale. In yesterday’s call, CFO Brown said that the size, structure and yield of the bond offering could still change.
“For bond buyers to be shirking a deal, the issue of the state takeover was likely the last straw. People don’t like to buy bonds that have uncertainty,” said Kristi Culpepper, Executive Director of the Kentucky School Facilities Construction Commission, which manages school bond offerings statewide in Kentucky.
Gov. Bruce Rauner’s announcement last week of plans to attempt a CPS takeover and enable Chapter 9 bankruptcy in Illinois likely impacted this week’s CPS bond offering, said Culpepper. Even if it wasn’t politically likely.
“A lot of muni market participants aren’t digging into the details of the credit,” said Culpepper. “Now you have people looking at it, and evaluating the risk. When you have a giant headline with the governor saying ‘We’re going to take it over,’ people think about it differently.”
CPS’ bond rating is four notches below investment grade, according to ratings agencies Standard & Poors and Fitch.
The 7.7% rate originally offered for the bonds is unusually high for munis, 5.24% higher than the standard rate investment grade bonds get. Because yesterday’s offering was not successful, CPS has two options: Raise the offering to a higher rate to attract more investors, or reduce the amount offered to the number of investors willing to buy. A higher rate means more costly borrowing, a lower amount offered means a more likely cash crunch later in the year.
As Aldertrack reported last week, CPS is heading into a dire cash position, projecting to end the school year in June with about $33 million in the bank. At the start of 2013, the Board had $1.07 billion in the bank. This month’s bond issue will help CPS get through a tight cash position and allow the school system to avoid more borrowing at high short-term rates. In December, CPS announced it had already incurred $1.065 billion in short-term debt.
If the current offering is not completed soon, CPS may fall back on even more costly bank debt, said DeNard. “We will make our cash flow needs. We do have short term financing available,” he said yesterday to reporters.
Meanwhile, if CPS is unable to complete the $875 million bond offering, or it has to reduce the size of the offering, there are few funding options available because the district has already met its property tax cap and Gov. Rauner has refused to approve a bailout without passage of his Turnaround Agenda. Chicago CFO Carole Brown alsosaid earlier this month, “The city has no plans to directly, financially assist CPS.”