CHICAGO – Hours after paying up to 8.5% interest for market access, the head of Chicago Public Schools acknowledged the uncertainty of a return any time soon.
When asked during an interview Wednesday evening on WTTW's Chicago Tonight program if the district can go back to Wall Street to borrow again, CPS chief executive officer Forrest Claypool said: "I don't know."
Claypool said the $725 million issue -- scaled down from the $875 million it sought to issue last week and even further reduced from the more than $1 billion it was eyeing late last year – temporarily solves the district's cash flow crisis. It allows the district to make its February debt service deposit and to manage through the next few months.
Generally speaking, Claypool said, "we can't borrow anymore….we have reached the end of the rope. We have to close the deficit and balance the budget."
The district is banking on cuts, a city property tax hike for teacher pensions, additional state funds, and teacher contract concessions to cut a looming $1 billion deficit.
The prospects on the latter two are longshots. The district is also eyeing a federal discrimination lawsuit over what it calls inequitable funding if state help isn't forthcoming.
"To us and many others, this is very reminiscent of the Puerto Rico GO deal that came in March of 2014. Investors who bought that deal thought it would solve PR's liquidity problem for a while, only to find out there were deeper structural problems," said Triet Nguyen, a managing director at NewOak Capital LLC. "Likewise, investors in the CPS issue will likely find out that it's only a Band-Aid solution that does nothing to resolve fundamental credit problems.
"In fact, this may well turn out to be CPS' last shot in terms of market access," Nguyen said.
"The structure reminds me basically of Puerto Rico's last deal," said one buyside source. "Access to the market will be challenged going further unless they cut the budget—which means teacher layoffs at this point."
The pricing Wednesday marked the culmination of a rocky two weeks during which the district's largely junk-level ratings took another hit and the Chicago Teachers Union bargaining group rejected a potential deal struck by a smaller group of negotiators.
Most damaging, market participants said, was talk from Gov. Bruce Rauner and fellow Republicans in the legislative minority about a state bid to take over the district and escalated talk of Chapter 9, even as majority Democrats labeled it dead on arrival.
The district pulled the deal off the negotiated calendar last week on the morning of the scheduled pricing when the underwriters, led by JPMorgan, couldn't pull together sufficient orders. Chicago Mayor Rahm Emanuel, his chief financial officer Carole Brown, the district's leaders and underwriters went to work over the next week.
The team proceeded cautiously Wednesday at first offering just $675 million with most orders locked up. They were able to raise it to $725 million and market sources said the deal just narrowly got done at a level of one times subscription due mostly to high-yield municipal investors.
The cost was punishing with a big discount offered on the bulk of the sale in a 2044 maturity and a punishing rate of 8.5%, 580 basis points over the top-rated Municipal Market Data benchmark. That's up 75 basis points from what the bonds were being marketed at a week earlier and nearly double the spread the district saw in its previous deal last spring.
"CBOE already had speculative grade credit quality months ago, the uncertainty that the governor's quotes and the recent labor vote added only amplify the already significant credit risk that CBOE carries," said Tom Schuette, co-head of research at Gurtin Fixed Income Management, LLC. "For CBOE to get it done, they were going to have to pay a very steep penalty and ultimately reduce the size."
In mid-January when CPS published its offering statement – before a fresh round of downgrades and the GOP's takeover legislation that was announced Jan. 20 -- spreads on the board's paper were between 350 and 375 basis points. They rose over the week to about 400 basis points and then after Rauner and the GOP announcement spiked another 50 basis points.
The rate also represents a stunning rise from the roughly 300 basis point spread the district saw on its last sale in April.
It came after rating downgrades triggered swap terminations, its CEO resigned over a federal probe, and Rauner said the district was a candidate for bankruptcy if the state were to enact a Chapter 9 statute.
The district had not yet fallen to junk when that deal priced. That began in May with a downgrade by Moody's Investors Service. Fitch Ratings and Standard & Poor's followed. The district has more than $6 billion of debt.
The timing of Rauner's takeover talk has prompted questions from city and CPS leaders about his motives; Chicago Mayor Rahm Emanuel has resisted pressure to back Rauner's governance and policy measures with the General Assembly's Democratic leaders.
Divisions over those items have driven the eight-month-old impasse that has kept the state government without a budget.
One published report said City Hall sources called the high interest rate the "Rauner premium."
Claypool was softer in his stance, saying only "it didn't help."
Rauner dismissed suggestions that his timing was aimed at sabotaging the deal. "That's ridiculous," he said Wednesday.
"I believe that is City Hall flailing and floundering and failing and looking to blame others for it," Rauner said.
"Bondholders will make their own decisions," the governor said of the CPS borrowing, adding with respect to investors, "frankly I don't much care about them one way or another."
Rauner also insisted that the takeover bill is not dead on arrival, suggesting some suburban and downstate Democrats might be swayed to break ranks.
Even if that threat goes nowhere, CPS' future market access is now clouded. That's after two decades during which it raised billions to build new schools and fix dilapidated older ones before turning to scoop-and-toss restructurings for relief from that debt load and to help cover operations.
