Delayed Chicago school bond sale tainted by bankruptcy talk

CHICAGO (Reuters) - The Chicago Public Schools (CPS) postponed Wednesday’s planned $875 million bond sale that became tainted by bankruptcy talk for the financially ailing district.

Carole Brown, the city of Chicago’s chief financial officer, said the delay will give investors more time to evaluate the district’s credit and the structure and terms of the “junk”-rated general obligation bond deal.

“There will be a ‘go, no go’ decision evaluation day-to-day until they’re in the market,” she told reporters on a conference call.

A proposal pushed by Illinois Republican lawmakers last week for a state takeover and potential bankruptcy filing for the school system made some investors skittish. Governor Bruce Rauner backed the proposal.

Nicholos Venditti, a portfolio manager at Thornburg Investment Management, said investors became concerned about how much they could recover on their investment should the district file for bankruptcy, which is currently not authorized by Illinois law.

“Bankruptcy talk a week ago is probably the biggest mistake that could ever been made,” he said.

Dan Solender, head municipal portfolio manager at Lord Abbett, said the bankruptcy proposal was “a strange thing” to pop up ahead of the bond pricing.

“Clearly, they couldn’t get enough people interested (in the bonds) at this point,” he said.

The nation’s third-largest public school system is struggling with a structural budget deficit of at least $1 billion and cash-flow that is dependent on borrowing. Chicago Mayor Rahm Emanuel, who controls the schools, and leaders of the Democratic-controlled state legislature quickly rejected the Republicans’ plan, making it unlikely any bills would advance.

A pre-pricing marketing scale circulated by underwriters on Tuesday for the bonds showed yields topping out at 7.75 percent with coupons of 7.25 percent for bonds due in 2041 and 7 percent for bonds due in 2044. That yield indicated a so-called credit spread over Municipal Market Data’s benchmark triple-A yield scale of as much as 506 basis points.

“We absolutely had indications of interest at those prices,” said Ron DeNard, senior vice president of finance at CPS.

The spread was wider than the 464 basis-point spread the school system’s 19-year bonds were fetching in secondary market trading last week.

In the district’s $275.6 million GO bond sale last April, the spread for 20-year bonds was only 285 basis points.

Chicago Board of Education’s bond issue includes a refunding and restructuring of outstanding debt to convert variable-rate bonds to fixed rate and to push out maturities on other bonds to free up money for the school system’s sagging budget. The issue will also raise money to cover fees to terminate interest rate swaps related to the variable-rate debt.