* Press release…
CPS Senior Vice President for Finance Ron DeNard issued the following statement regarding CPS’ bond sale of $725 million in tax-exempt bonds today.
“Borrowing money was never a decision that we took lightly and though some wanted our efforts to fail, CPS needed to move forward in order to keep our doors open so we could educate our children. 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. CPS faces many financial difficulties ahead, but we are committed to working with CTU on a long-term contract and the State to finally address the inequitable state funding for CPS that is driving the District’s budget imbalance.”
Background
CPS will make its February 15 debt service payments.
CPS priced $725 million in tax-exempt bonds.
These bonds will largely reimburse the operating fund for expenses that the District has already paid, including capital expenses.
The bonds include $206 million of debt restructuring to provide immediate budgetary relief in FY16.
CPS will postpone its plan to convert variable-rate debt to fixed-rate debt.
CPS will postpone reimbursing the general operating fund for some of the swap termination fees.
I’ll let you know when I know more.
…Adding… This is from a bit earlier today…
About $615 million of tax-exempt securities due in 2044 are pricing for a preliminary yield of 8.5 percent and about $60 million of debt due in 2026 is pricing for a preliminary 7.75 percent, according to four people with knowledge of the deal who requested anonymity because the pricing isn’t final. The top yield is about 5.8 percentage points more than benchmark municipal debt that matures in 29 years, data compiled by Bloomberg show.
“They’re in very severe financial straits,” said Dan Heckman, a senior fixed-income strategist in Kansas City at U.S. Bank Wealth Management, which oversees $128 billion. “This is just an effort to hopefully buy some time so they can continue to get their house in order but what a steep price they’re paying.”
They have a statutory cap of 9 percent, so it’s gonna be tough to go back to the markets unless they improve their financial position.
…Adding More… Usurious rates confirmed…
According to a city spokeswoman, $665 million in bonds maturing in 2044 were sold at a price of 8.5 percent,and $60 million in 2026 maturity securities at 7.75 percent. That’s roughly 580 basis points—almost six full percentage points—more than would have been charged to an AAA-rated school district.
Part of that is due to the terrible condition of Chicago schools. And, city aides are suggesting, part of it is due to Gov. Bruce Rauner’s repeated suggestion that CPS file for bankruptcy, raising market skittishness.
Officials originally planned for an $875 million bond issue. There was no immediate indication how they will make up that shortfall.
- Team Sleep - Wednesday, Feb 3, 16 @ 4:29 pm:
Paulie Walnuts guaranteed a great rate of 15 points plus further considerations.
- Anonymous - Wednesday, Feb 3, 16 @ 4:30 pm:
So CPS borrowed at 8.5% and still faces huge financial challenges? How long does this allow them to go until running into their next cash flow crisis?
- There is power in a union... - Wednesday, Feb 3, 16 @ 4:30 pm:
““and though some wanted our efforts to fail,”
Like our governor…
- burbanite - Wednesday, Feb 3, 16 @ 4:31 pm:
Which is why Karen Lewis’ switch back to her old rhetoric is not helpful. The cuts were hardly “an act of war”, more like an act of self preservation.
- Chicago Cynic - Wednesday, Feb 3, 16 @ 4:31 pm:
8.5%?????? Wow. Someone sure thinks this is a risky investment.
- The Captain - Wednesday, Feb 3, 16 @ 4:33 pm:
There’s a place at North and Western, if they bring the titles to all the police cruisers you can get quick cash no questions asked. You’d probably get a better rate.
- NixonHead - Wednesday, Feb 3, 16 @ 4:34 pm:
That interest rate is ridiculous.
- cdog - Wednesday, Feb 3, 16 @ 4:34 pm:
In Rauner World, this is exactly what happens to the GOMB forecasted $25billion bill backlog projected in four years.
Can you imagine? $12 BILLION (fy16) to $25 BILLION (fy19) at 8.5% interest. 6% above a benchmark.
Dang, we are headed down a dark alley.
- cb - Wednesday, Feb 3, 16 @ 4:35 pm:
trading “time for money” is a bad business decision most of the time unless there is new revenue to cover the expected shortfall later. This seems like just a one year fix with more pain next year.
- Libertarian - Wednesday, Feb 3, 16 @ 4:36 pm:
PONZI SCHEME
- From the 'Dale to HP - Wednesday, Feb 3, 16 @ 4:37 pm:
In a state that specializes in kicking the can down the road, this today might take the cake.
- CTU is a disaster - Wednesday, Feb 3, 16 @ 4:38 pm:
Karen Lewis should be forced to buy the CPS bonds.
- IL Taxpayer - Wednesday, Feb 3, 16 @ 4:39 pm:
Scary. Illinois is hopelessly broke. Chicago is hopelessly broke. CPS is hopelessly broke. The federal government is hopelessly broke. When will it all come falling down?
- SAP - Wednesday, Feb 3, 16 @ 4:40 pm:
How much of that rate is attributable to the comments made by Bruce Rauner and Karen Lewis in the past 24 hours?
- cdog - Wednesday, Feb 3, 16 @ 4:41 pm:
I must also say, again,
I will gladly pay a higher income tax rate on all my income over $1,000,000, in exchange for the school district disappearing from my property tax bill. /s
I am sure the taxpayers of Chicago would agree. Let’s hear a proposal like this Dem Leaders! The support is there to start the steps for this.
(I don’t know the steps to get the constitutional change for a progressive tax (on the November ballot?), but God willing the Red Sea did part.)
- From the 'Dale to HP - Wednesday, Feb 3, 16 @ 4:42 pm:
Completely agree SAP. Karen Lewis is at fault here, calling for a revenue solution to help/save CPS. What a nut job.
- scary future - Wednesday, Feb 3, 16 @ 4:46 pm:
cps teachers are a cross between babysitters and police guards keeping these youths off the streets. not much learning is going on
- 39th Ward - Wednesday, Feb 3, 16 @ 4:47 pm:
Rauner and the Repub leadership must accept their share of responsibility here (in addition to CTU’s intransigence). The hint of a legislative change to allow bankruptcy by CPS, and the willingness of the executive to exercise that power, simply added a huge amount of interest charge to this borrowing to reflect the additional risk to the lender.
- SAP - Wednesday, Feb 3, 16 @ 4:50 pm:
‘Dale: I put it on Rauner AND Lewis. Rauner for intentionally trying to tank the deal and Lewis for talking first and thinking second (if at all).
- Bud Keyes - Wednesday, Feb 3, 16 @ 4:55 pm:
8.5% is what student debt is at… Maybe that is too high too!!!!
- Cook County Commoner - Wednesday, Feb 3, 16 @ 4:55 pm:
I remember when the hate Wall St crowd chanted “privatization of profits and socialization of losses” when condemning the big bank bailouts by the feds. I guess this isn’t as bad. But if I were a Chicago taxpayer I would be mad as h**l.
Mayor Emmanuel must have made a great sales pitch to convince the underwriters that this junk wouldn’t receive a haircut in fed court, at least until they can sell it profitably and it reaches folks 401ks near and far.
- Tone - Wednesday, Feb 3, 16 @ 4:56 pm:
“- CTU is a disaster - Wednesday, Feb 3, 16 @ 4:38 pm:
Karen Lewis should be forced to buy the CPS bonds.”
Maybe we can have the pension fund buy the bonds?
- Tone - Wednesday, Feb 3, 16 @ 4:58 pm:
As a CPS parent and a Chicago taxpayer, this is atrocious. I am thinking Rauner’s plan for CPS is best.
- Michelle - Wednesday, Feb 3, 16 @ 4:59 pm:
just a note to Cook County Commoner - the federal gov. forced a number of the banks to take a bailout (NTRS for one) that did not need it. Loans were paid back with interest, unlike the GM / union bailout
- TD - Wednesday, Feb 3, 16 @ 5:00 pm:
scary future, thanks for the prejudice and ignorance!
From the Dale - lets be clear that the Governor has significantly exacerbated this situation at every turn. He and Claypool purposefully elicit responses from CTU and Lewis.
- Huh? - Wednesday, Feb 3, 16 @ 5:03 pm:
Who bought the bonds and what is their connection to the governor and/or his businesses?
Given the smack that 1.4% has been talking about the bonds, one can only guess that it was an effort to increase the interest rate.
- Last Bull Moose - Wednesday, Feb 3, 16 @ 5:04 pm:
CCC, you don’t put tax exempt bonds in a 401k. Other than that I agree with you.
- RNUG - Wednesday, Feb 3, 16 @ 5:06 pm:
== (I don’t know the steps to get the constitutional change for a progressive tax (on the November ballot?), but God willing the Red Sea did part.) ==
Both chambers of the General Assembly have to pass it in sufficient time to get it placed on the November ballot for voter approval. The clock is ticking …
- Blue dog dem - Wednesday, Feb 3, 16 @ 5:11 pm:
Folks just wait. In approx 7 years the SSA will recalc life expectancies. If you think pension payments are tough to make now……..
- Shemp - Wednesday, Feb 3, 16 @ 5:13 pm:
I am sure the Gov is flattered by everyone’s assumption of his influence on bond rates, but this train’s been on this track for far longer than Rauner has been conductor.
- cdog - Wednesday, Feb 3, 16 @ 5:25 pm:
thanks, RNUG.
So, since “both chambers of the General Assembly have to pass it in sufficient time to get it placed on the November ballot for voter approval. The clock is ticking … ”
And, we know that these two Chambers have been known to move a few mountains in hours, in the past…
LET’S ROLL!
I see nothing but upside for Cullerton and Madigan, to tie the something like this to their school formula reform package.
The only poor folks that would be opposed to this, aren’t so poor.
- Blue dog dem - Wednesday, Feb 3, 16 @ 5:27 pm:
These are not investment grade bonds, what does that tell you?
- cdog - Wednesday, Feb 3, 16 @ 5:28 pm:
Does the Governor have to sign? (in order for a progressive tax constitution change, passed by the Legislature, to be placed on the ballot?)
- Anonin' - Wednesday, Feb 3, 16 @ 5:38 pm:
Griffin and Sell high fivin’ $supeRstars tonite for extra juice…great job
- ejhickey - Wednesday, Feb 3, 16 @ 5:49 pm:
Didn’t CPS originally want to borrow $875 million? Does this sale indicate they could not sell all of the bonds they wanted to sell, even at these sky high rates?
As per my rough calculations , it looks like CPS will pay at least $1.6 billion in interest alone over the life of the bonds plus repayment of the principal.
This is a situation ripe for default.
- cdog - Wednesday, Feb 3, 16 @ 5:59 pm:
@ejhickey No worries.
Got the default thing covered with some sweet credit default swaps. /s
Win/Win. (default probably pays better than the 8.5%)
- TinyDancer(formerly Sue the other one) - Wednesday, Feb 3, 16 @ 6:07 pm:
8.5%.
Thanks, Bruce.
- Paulie Walnuts - Wednesday, Feb 3, 16 @ 6:11 pm:
==How long does this allow them to go until running into their next cash flow crisis?==
If there’s no strike, then Labor Day is likely the next collection day for the vig.
- northsider (the original) - Wednesday, Feb 3, 16 @ 6:13 pm:
How are the Governor’s repeated and intentional statements not securities violations?
- cdog - Wednesday, Feb 3, 16 @ 6:15 pm:
I switched devices so not sure if I was edited, or just forgot to put my name on my post. Trying again…
Tin foil hat time.
If Rauner bullies his way into controlling the CPS and declares bankruptcy, would he be able to stop making debt payments, thus triggering the default swaps?
- Sue - Wednesday, Feb 3, 16 @ 6:16 pm:
Folks- the interest rate paid by CPS has nothing to do with any statements Rauner made last week. CPS/Chicago are rated B- by the rating agencies. If they need to borrow, that is the cost of their credit rating be substantially below investment grade. Bond investors are the smartest investment professionals on the Street- they evaluate credit risk and don’t give a hoot about comments made in he heat of political disputes
- Anon2U - Wednesday, Feb 3, 16 @ 6:19 pm:
Shemp for the win.
Anyone blaming the Governor for the high interest rate have no idea how debt risk works. Decades of bad management and even worse borrowing practices has led to this. A few sentences in the press did not lead to junk status.
CPS is in essence, bankrupt. All today’s borrowing did was make it harder to get solvent any time soon.
- Paulie Walnuts - Wednesday, Feb 3, 16 @ 6:21 pm:
EJ == CPS will pay at least $1.6 billion in interest alone over the life of the bonds==
I think CPS would tell you that they will refinance these bonds at a lower rate once Springfield bails out CPS.
HaHaHaHaHaHaHaHaHaHaHaHa
- Hit or Miss - Wednesday, Feb 3, 16 @ 6:32 pm:
===8.5%?????? Wow. Someone sure thinks this is a risky investment.===
The 8.5% interest rate probably understates the risk that the bond buyers face for such a long bond. With the risk of bankruptcy a possibility in the near future for CPS I would consider the interest rate of 8.5% to be too low and would not buy the bonds for my portfolio.
- Wensicia - Wednesday, Feb 3, 16 @ 6:35 pm:
==And, city aides are suggesting, part of it is due to Gov. Bruce Rauner’s repeated suggestion that CPS file for bankruptcy, raising market skittishness.==
Yep, Sabotage Agenda in full momentum.
- RNUG - Wednesday, Feb 3, 16 @ 6:55 pm:
== If Rauner bullies his way into controlling the CPS and declares bankruptcy, would he be able to stop making debt payments, thus triggering the default swaps? ==
First the General Assembly will have to pass a bill allowing CPS to declare bankruptcy …
Rauner might be able to muscle control as part of a deal but I’d bet against being allowed to declare bankruptcy.
- Arthur Andersen - Wednesday, Feb 3, 16 @ 6:55 pm:
Sue, I don’t agree with you on the rating/pricing comment. If the risk was fully “baked in” to the rating, to use jargon, the issue would have priced closer to the “face price” of $875 million, although that number may be high if the issuer CPS changed the term structure on sale day. The difference in proceeds between the face price and proceeds reflects the bond buyers’ (and they are savvy) total assessment of the risk of the bond, including the rating and other due diligence including but not limited to goofy statements made by union leaders and elected officials prior to an offering.
- NixonHead - Wednesday, Feb 3, 16 @ 6:57 pm:
You don’t need Gov Rauner to tell anyone that BK is a possibility for CPS. That’s like blaming Ernst & Young for high interest rates after they released the report showing that CPS will end up in de-facto BK anyways. Bond traders are smart enough to base their investment decisions on mathematical realities, not some press conference held by the Gov in Illinois. Risk is priced through factual, objective criteria - not political press conferences.
- RNUG - Wednesday, Feb 3, 16 @ 7:07 pm:
For the GA to put up a constitutional amendment, it has to:
* Be read 3 times in each chamber
* Pass both chambers with 60%
* Pass 6 months before the General Election
* No more than 3 amendments per election cycle
* Be presented to voters in a General Election
See 1970 Constitution, Article 14, Section 2:
http://www.ilga.gov/commission/lrb/con14.htm
So there is only a couple of month window left to get a millionaire’s surcharge amendment or a progressive income tax amendment on the ballot for 2016.
- allknowingmasterofracoondom - Wednesday, Feb 3, 16 @ 7:16 pm:
And wrap your brain around this - the money was spent the minute it hit the CPS account.
- Sue - Wednesday, Feb 3, 16 @ 7:27 pm:
AA- face amount reduced by CPS last week after they learned of investor appetite and the interest rate which was to be paid-blame this on Daley raiding the pension fund starting in 1995. Sick of hearing of unequal funding, CPS receives huge discrepancy in student dollars- issues about TRS don’t wash. CPS was fully funded in 1995- TRS was at or near 45 percent at the same time. City mismanaged CPS and now they are hiding between the pension funding issue. Let it go bankrupt, restructure borrowing, cut pension obligations and reign in CTU contract. Don’t look for a suburban bailout- we have our own funding issues and State is reducing what it pays which has been an ongoing fact for years. I have said on this blog for years, we are all paying more for pension costs while rest of funding for state programs being effected.
- Arthur Andersen - Wednesday, Feb 3, 16 @ 7:39 pm:
Sue, I wasn’t aware of a reduction in the face price.
I agree with you on the TRS/CTPF issue. No one from CPS or CTPF ever wants to talk about the $650 million that was sent to CTPF under Daley to pay pension costs but instead was funneled off to pay CTPF retiree healthcare subsidies.
- wordslinger - Wednesday, Feb 3, 16 @ 7:41 pm:
You Rauner spin-doctors are hilarious. And bad at it.
You think a guy like Rauner, who made his fortune as a vampire capitalist, doesn’t know the play when it comes to shorting a security through the media?
What, he’s a rube or something, and just accidentally yells “bankruptcy” every time CPS is set to go to market and doesn’t understand what he’s doing?
–Bond traders are smart enough to base their investment decisions on mathematical realities, not some press conference held by the Gov in Illinois. Risk is priced through factual, objective criteria - not political press conferences.–
LOL, you’ve obviously never been on a trading floor or in a brokerage trading room in your life. Apparently, you’ve never even watched a CNBC report from a trading floor and heard what news influences markets.
They’re the most wired-for-media places on Earth. They Hoover up every bit of information they can, every rumor, every edge, because every tick one way or the other can mean a fortune.
Bloomberg became a multi-billionaire just because he figured out how to deliver news to the markets a few seconds quicker than Dow Jones.
–You don’t need Gov Rauner to tell anyone that BK is a possibility for CPS.–
Currently, bankruptcy is not a risk for CPS. There is no legal avenue for that to occur. And bond buyers knows that.
But when the governor of the state consistently expresses his wish for enabling legislation to allow for the school district to file for bankruptcy, bond buyers have to add that potential future possibility to the risk assessment.
- Anon2U - Wednesday, Feb 3, 16 @ 8:07 pm:
Wordslinger,
Dude. Ever hear of underlying fundamentals? They are often used to value stocks, commodities and other assets. The underlying fundamentals are, as simply as I can put it, that CPS has for years SPENT more than they have taken in. Outflows have been greater than inflows. Liabilities outpace assets. Their balance sheet doesn’t balance!
It is true that in Illinois, as of today, Chicago cannot utilize bankruptcy protection because the law does not allow it. However, from a purely financial standpoint, they are insolvent. I.e. Bankrupt.
Claypool on Chicago Tonight could not have been more clear on their ability to borrow more. They cannot. Think about that though, borrow more to get solvent?? Insanity.
- cdog - Wednesday, Feb 3, 16 @ 8:16 pm:
From what I have gleaned from recent arguments, CPS would not not be insolvent if their students had received the same state support as non-CPS students.
Seems, as brought up earlier in another thread, as a potential civil rights issue for the under-funded CPS. Why is everyone else so special to receive a premium on their state funding?
Revise the formula, pass a millionaire and/or progressive tax, and delink as much as possible from property tax.
No downside for normal folks.
- wordslinger - Wednesday, Feb 3, 16 @ 8:21 pm:
Annon, I do understand the underlying fundamentals.
I was ridiculing the nonsensical spin that markets ignore news and politics when assessing risk, and that the governor didn’t know what he was doing every time he yelled “bankruptcy” when CPS was set to go to market.
Like I said, the guy knows the play when it comes to shorting a security through the media.
Obviously, his actions aren’t the major reason for price, but they add to the juice.
And why the heck would a governor do that, anyway?
- Sue - Wednesday, Feb 3, 16 @ 8:31 pm:
Cdog-the pension funding is only a ruse- on a per student basis considering all education funding- CPS is not receiving less money from Springfield- the fact that the State Pays more to TRS vs CTPS is the dog that won’t hunt and had been litigated I believe three times each time with CPS and CTU losing.
- blue dog dem - Wednesday, Feb 3, 16 @ 10:46 pm:
Word. I am not condoning it, but the RAUN Man wants CPS to go under.
- A. Nonymous - Wednesday, Feb 3, 16 @ 11:26 pm:
Are any enterprising investigative journalists looking into whether or not the Governor’s big money allies (or even the Guv himself) make a profit off of CPS when the Guv makes his doom-n-gloom prophecies about CPS skipping a payment or Springfield taking over CPS.
Rich noted before that every time he does that it sends Wall Street into a tizzy.
Is Rauner trying to manipulate the markets???
- Anonymous - Thursday, Feb 4, 16 @ 5:39 am:
Starting in 1995 the Chicago Public Schools took a TEN YEAR pension holiday, missing payments into the system of $2B. I know it is water under the bridge, but the situation is presented to the public a a sort of act of god…like we are so surprised we got to this point. http://www.chicagobusiness.com/article/20121129/BLOGS02/121129786/heres-why-chicago-teachers-pension-fund-is-in-meltdown
- Huh? - Thursday, Feb 4, 16 @ 7:27 am:
Again, who bought the bonds and what is their connection to 1.4?
Words have consequences. The governor knew that what he said was going to drive up the interest rate.
- Carhartt Representative - Thursday, Feb 4, 16 @ 7:56 am:
CPS finances are a mess, but they’re not really close to bankruptcy. Their issues really aren’t fixable off the back of teachers either. Teacher salaries cost CPS less than 2011 and not much more than 2005. What is killing CPS finances are interest payments, unpaid pension debt, and charter school expenses. If the teachers agreed to work for free next year, they’d still be in the red.
- Abe the Babe - Thursday, Feb 4, 16 @ 8:32 am:
I don’t know many governors who would openly and actively try to sabotage the leading school program in their state in the hopes it collapses.
I mean Blago did shakedown a children’s hospital but is Rauner’s designed destruction much better than that?