CHICAGO – Chicago Public Schools closed on $325 million of short-term borrowing earlier this month and plans a $150 million draw next month from new credit lines to bolster its liquidity.
The draws mark the first under two new lines established this month that total $475 million and are being provided by JPMorgan, CPS officials said. CPS didnt disclose terms or the interest rate on the debt.
Limited information on the financings, which are structured as tax anticipation notes, was available in notices filed on the Municipal Securities Rulemaking Board's EMMA website. The junk-rated district closed Sept. 8 on
"CPS remains in negotiations on additional lines of credit, as planned," officials said. JPMorgan provided lines to the district in fiscal 2016 and ran the books on its last public offering.
The district has made no secret of its need to use lines -- without reserves or cash balances to manage liquidity as it awaits state aid and property tax payments – and that dependence won't end anytime soon.
"The board expects to continue to borrow in the short term market to fund its operating cash flow needs in fiscal 2018 and until its negative cash position can be addressed," read its most recent offering statement published earlier this month on a
The district's governing body, the Chicago Board of Education, last month approved a $400 million increase in line capacity, giving the district room to leverage up to $1.55 billion of anticipated revenue.
Rating agencies had said that deals on new lines are crucial to staving off a fall deeper into junk territory.
"If the board is unable to secure the lines of credit it plans to use to fund its cash-flow needs, we could lower the rating by multiple notches," S&P Global Ratings said in its review of the private placement. S&P rates the district B-plus and has the credit on negative watch where it's been since January.
Moody's Investors Service and Fitch Ratings also assign junk ratings. Moody's was not asked to rate the private placement. Fitch affirmed its B-plus rating and negative outlook. Kroll Bond Rating Agency assigned the bonds a BBB and negative outlook.
The district finished repaying fiscal 2016 lines in August, according to bond documents. The district issued $1.1 billion in tax anticipation notes during fiscal 2016 that paid rates of 3.25%, expensive for debt of a short duration.
The board projects it will have fully tapped its note capacity in February and will use its March property tax payment to pay down that debt. The board projects it will have $950 million in TANs outstanding at the close of fiscal 2017 on June 30 and will pay them off in August.
Several market participants said the establishment of new lines means the district can continue to get by as it works to fix its finances, while some see the continued dependence as a warning sign.
"The growing amount of short term borrowing they are seeking as a percentage of their overall budget and the rates that they are having to pay to secure these lines are the variable factors that warrant watching as the district tries to repair its condition," said Tom Schuette, co-head of investment research and strategy at Gurtin Municipal Bond Management.
While CPS chief Forrest Claypool has publicly expressed confidence in the district's solutions to its $1.1 billion deficit, the latest OS acknowledges the district's deep stress and dubious nature of several revenue streams the district counts on to close the gap.
The fiscal 2017 budget relies a state-approved $250 million pension property levy, $130 million in supplemental grant funding this year only, and another $215 million in support for teacher pensions.
The latter is contingent on state lawmakers tackling state pension reform in 2017, something the OS acknowledges. It also says the district needs the teachers' pension fund to credit the $250 million tax levy toward its $700 million payment owed in June until the property tax revenue is collected. The district said Monday it remains in negotiations.
In the absence of both funding streams "the board's 2017 budget will have an additional $465.2 million deficit between revenues and expenditures," according to the OS.
The district also wants to phase out the $130 million annual cost of covering 7% of the teachers' 9% pension contribution. The Chicago Teachers Union has warned the move could provoke a strike and union members will be polled next week on whether to re-authorize one.
The district's long term pressures also abound.
In addition to its big teachers' fund payment, the district must deposit $393 million in February for upcoming debt service. The teachers' fund has $10 billion of net pension liabilities, up from $9.5 billion in 2014. The funded ratio stands at 51.6%, down from 53% a year earlier. The board's operating fund balance is now in negative territory having drained its 2012 balance of $1 billion.
JPMorgan purchased the bonds and may publicly offer them at higher or lower prices than initially paid. The bonds paid a 6.5% interest rate with a final maturity in 2046. The district paid a high of 8.5% on its last public offering earlier this year.
In addition to short-term borrowing, the district alerts investors to its continued plans on long-term borrowing despite its punishing rates.
The district intends to tap a $45 million property tax levy for capital spending – approved by the city council last fall -- to back borrowing this year under a $945 million bonding appropriation. The district can annually raise the levy at the rate of inflation and then can be increase it by another $142.5 million in 2031. Detailed structuring plans have not been announced.
The board also has remaining authority from a 2015 ordinance to convert floating-rate debt to a fixed rate. The district's $6.8 billion long term debt load includes $1.1 billion of costly floating-rate debt from nine series in 2008, 2011, 2013 and 2015. The district is paying, or will be paying by 2018, 9% on more than half of the floaters after remarketing cycles.
Rating agencies warn that the district remains on shaky ratings ground.
"We are not lowering the rating further at this time because, in our opinion, the board's credit weaknesses are incorporated within the current rating. However, we still have major concerns about the board's liquidity," S&P wrote.
