March 20, 2015 / 7:20 PM / 4 years ago

UPDATE 2-Fitch downgrades Chicago Board of Education rating to BBB-

(Rewrites throughout after comments from school district officials)

CHICAGO, March 20 (Reuters) - A downgrade by Fitch Ratings of the Chicago Board of Education’s credit rating to one step above junk on Friday could cost the fiscally ailing school district about $228 million in payments to banks over terminated swaps deals.

Fitch dropped the rating three notches to BBB-minus, which coupled with last week’s cut by Moody’s Investors Service, pushed the Chicago Public Schools (CPS) below the ratings threshold for swaps it uses to hedge interest-rate risk on debt, allowing bank counterparties to end the deals.

Moody’s cut the rating two notches to Baa3 and on Wednesday, Standard & Poor’s Ratings Services dropped the rating two notches to A-minus.

CPS has been in contact with the counterparties and is working to renegotiate terms and reduce potential payments, district CFO Ginger Ostro said in a statement. Ostro said the downgrade “could potentially result in termination payments of an estimated $228 million.”

Fitch cited several reasons for the downgrade, including the school system’s structural budget deficit, diminished liquidity, big pension liability, high debt level and the prospect of difficult negotiations with the Chicago Teachers Union.

The lower rating, which covers all of the district’s $5.6 billion of general obligation bonds, carries a negative outlook, meaning it could potentially fall further.

CPS CEO Barbara Byrd-Bennett said in a statement fiscal problems stem mainly from pensions costs, which have tripled since 2013.

Bank counterparties have the ability to terminate the swaps if the school system’s rating falls below Baa2 with Moody’s and below BBB with either Fitch or S&P.

As of the end of fiscal 2014, CPS had 10 swaps outstanding, according to a bond offering document by the district.

“In order to avoid a termination payment, Fitch believes the district will have to either renegotiate the terms of the swaps with the counterparties or bond for the funds, as cash balances appear inadequate to cover both termination payments and operations,” the rating agency said.

The district plans to sell about $372 million of new and refunding GO bonds next week.

CPS has projected a $1.11 billion deficit in its budget for the fiscal year that begins June 30 with estimated revenue of $4.8 billion and expenditures of $5.9 billion.

Fitch said the district has limited options to address its deficit, noting it will downgrade the rating further if there is a lack of clear and meaningful progress to reduce the gap. (Reporting by Karen Pierog; Editing by Chris Reese and Grant McCool)

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