Courtesy of Mish.
On Wednesday, the Chicago Board of education pulled the plug on a proposed $875 Million Bond Sale.
Facing hefty yields, the financially ailing Chicago Public Schools (CPS) postponed Wednesday’s planned $875 million bond sale and will evaluate the timing on a day-to-day basis, a school official said.
The nation’s third-largest public school system is struggling with a structural budget deficit of at least $1 billion. Its fiscal woes led Illinois Governor Bruce Rauner and Republican lawmakers last week to push for a state takeover and potential bankruptcy for CPS – moves that were quickly shot down by Chicago Mayor Rahm Emanuel, who controls the school system, and leaders of the Democratic-controlled legislature.
A pre-pricing marketing scale circulated by underwriters on Tuesday for the “junk”-rated general obligation 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.
That spread was wider than the 464 basis-point spread the school system’s 19-year bonds were fetching in secondary market trading last week.
Five Questions for Chicago
- Will the yields be any lower tomorrow? Next week? Why?
- How the heck is the school district going to close a hole of at least $1 billion?
- Will Emanuel push for yet another massive tax hike just to pay teacher pensions?
- How can another tax hike do anything but postpone the problem?
- Since the most likely outcome is bankruptcy, why was the yield offering so good?
Reflections on Bankruptcy
In regards to question number five, 7.75% seems very attractive given the high likelihood those bonds will soon be worthless.
Heck, even 10% would be a bargain for the city and a horrid deal for the bondholders.
But that’s not the way markets work. No one thinks bankruptcy is coming until it’s a few weeks away. And of course, for bankruptcy to be possible, the Illinois legislature has to approve it.
Governor Bruce Rauner needs to hold firm until Emanuel begs the union-controlled Illinois legislature to pass a municipal bankruptcy bill.
“I’ll Be a Better Mayor”
…
