Courtesy of Mish.
Bad news on Chicago is deep and broad:
- The Chicago Public School System has a $1.1 Billion Budget Hole in $5.9 Billion Budget
- A $228 to $263 million derivative time bomb just triggered on the Chicago Board of Education
- Chicago Public Schools may be out of cash in 30 days
- Corruption investigations plague the school board
- Chicago booted Moody’s as a bond rater
- Roadblocks impair pension reforms by the Illinois legislature
- Rauner issued a statement he will not bail out Chicago on the backs of Illinois taxpayers
- Chicago teachers threaten strikes demanding more money that isn’t there
Let’s investigate those ideas starting with the bond rating cuts that triggered the derivatives time bomb.
Bond Rating Cuts
On March 9, Moody’s dropped Chicago School bonds two notches to Baa3, that last rank above Junk.
Chicago responded by dumping Moody’s in favor of little-known rating agency Kroll, essentially shopping around for better results.
This is the way the system works. Ratings agencies lose business if they do not rate bonds high enough.
On March 20, Fitch downgraded Chicago Board of Education Rating to BBB-, also one step above junk.
Synthetic Swaps
Chicago is involved in ill-advised synthetic fixed-rate interest swaps that have a negative value of $228 million according to Moody’s and negative $263 million according to Fitch.
As part of the swap agreement, a forced termination event triggers when rating agencies lower the district’s General Obligation bonds to below the mid-triple B level. That happened with Fitch’s downgrade.
Swap Termination Triggers…
