Financially strapped Chicago Public Schools (CPS) has managed to achieve an A rating for $500 million in construction bonds to complete almost a billion dollars in capital improvements with some planning and a capital improvement tax providing “unique credit and security,” says Ron DeNard, CPS’s senior vice-president of finance.
Chicago Sun-Times reports that the Fitch ratings agency has given “a proposed bond issue an A rating with a stable outlook — that’s eight steps above the junk rating of B-plus with a negative outlook that the ratings agency has assigned to the $6.8 billion in CPS’ general obligation debt. The Kroll Bond Rating Agency Inc. also rated the bonds at BBB, deeming them of “medium quality.”
CPS accomplished the feat in two ways: First by proposing the sale of a half-billion dollars in capital bonds tied to a special property tax, and second, by raising the specter of a “hypothetical bankruptcy” in its bond offering to assuage investor fears about the cash-strapped district’s financial risk, the newspaper reported.
“The credit is secured by a new, unencumbered, limited purpose, dedicated property tax levy within the school district that will be statutorily limited to capital improvement. (It) cannot be used for operating expenses,” DeNard said in a recorded presentation. “The CIT aren’t general revenue nor are they available for debt service on any of the board’s existing debt.”
Bond counsel Katten Muchin Rosenman LLP and underwriters’ counsel McDermott Will & Emery LLP both say that the property tax levy for capital improvements would qualify as “special revenues” isolated from general operations under the U.S. Bankruptcy code, according to the Sun-Times.
“That means there would be no risk to investors, even in the event of a CPS bankruptcy,” the newspaper reported. “The bonds would be exempt from a typical automatic stay on debt held by an entity filing for bankruptcy protections.”
Investors would be further protected by a “direct intercept” structure that means CPS never touches the money from the special property tax. A provided flowchart shows the tax money going from taxpayers to county collectors to a third-party trustee. The debt-service fund is at the top of the payment list.
“CIT revenues flow directly from a third-party intercept structure isolating the CIT credit from the board’s general credit,” the documents state.