July 7, 2017 / 4:19 PM / a year ago

Troubled Chicago school system sets $250 million bond sale

CHICAGO, July 7 (Reuters) - Chicago’s public school system will sell $250 million of bonds as soon as next week even as it faces a possible downgrade from Moody’s Investors Service to the deep junk level of Caa1, signifying high credit risk.

The Chicago Board of Education wants to raise $200 million from the sale of general obligation bond sale through lead underwriter J.P. Morgan, according to the preliminary official statement. It plans to use the proceeds to reimburse costs of terminating interest-rate swaps and for capital improvement expenditures.

Another part of the deal will restructure $50 million of outstanding debt in a “scoop and toss” that pushes out payments on the bonds to 2046.

The district, which will offer the bonds with no ratings, included nine pages of potential risks for buyers in the prospectus.

Escalating pension payments have led to drained reserves, debt dependency and junk bond ratings for the third-largest U.S. public school system, which is paying high interest rates on its short and long-term debt.

Moody’s on Thursday placed the district’s B3 rating, which is one notch above Caa1, on review. It cited a delay in state grant payments of $466.5 million that Illinois was to have paid the Chicago Public Schools by June 30.

“The rating review will consider any appropriation action the state takes that may or may not address the district’s short-term liquidity needs and long-term budgetary hurdles,” Moody’s said in a statement.

Molly Poppe, a spokeswoman for Chicago Mayor Rahm Emanuel, who controls the public schools, declined to comment on Moody’s review. She pointed to the mayor’s December request for Moody’s to withdraw all of its Chicago debt ratings.

Nationwide, the $10.5 billion of bond and note deals scheduled to price in the coming week include $1 billion of New York City Transitional Finance Authority building aid revenue bonds. Bank of America Merrill Lynch will hold a retail presale period for the AA-rated bonds on Monday and Tuesday, followed by formal pricing on Wednesday. The New York and New Jersey Port Authority will sell $828.6 million of consolidated bonds through Goldman, Sachs & Co , which will offer the AA-minus-rated debt to retail investors on Wednesday ahead of formal pricing on Thursday.

The Pennsylvania Turnpike Commission’s $770 million subordinate revenue bond issue is pricing on Thursday through Citigroup Inc. (Reporting by Karen Pierog; Editing by Lisa Von Ahn)

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