On February 4, I noted Chicago on Brink of Bond Market Shutoff as tax-exempt yield hit a stunning 8.50%.
“Bond Girl“, Kristi Culpepper, an expert on capital projects and debt chimed in on Chicago’s offering last week in the biggest slam on bonds I have ever seen anyone make.
Specifically, Culpepper says “CPS Genuinely Insolvent“, but her tirade does not stop there.
Please consider some excerpts from Culpepper’s latest article Chicago Public Schools and Antisocial Behavior in the Capital Markets. The snips are in regards to the 8.5% yield on the CPS’ latest bond offering.
The sole purpose of this bond issue was to provide CPS with a few months of budget relief, not unlike the general obligation bonds Puerto Rico issued immediately before being cut off from the capital markets in 2014. And in exchange for the ability to cash flow until this June, CPS will be making payments on this new debt until 2044 at an interest cost of 8.5% — roughly triple what a top-rated borrower would be paying.
Just under $40 million of the bond proceeds will be treated as capitalized interest, meaning that CPS borrowed money to pay the investors who are buying their bonds so they can use the money that would otherwise be used to service the debt for other purposes. Approximately $208 million of the offering was a “scoop and toss” refunding. This means CPS is extending the maturities on debt that is currently coming due so the district does not have to pay that either.
So Chicago taxpayers incurred a lot of new debt that they have nothing of tangible value to show for. It’s just a simple transfer of their wealth to the capital markets, on top of the quarter of a billion dollars they recently paid their interest rate swap counterparties. This has become a routine occurrence not only for CPS, but for the City of Chicago, which shares the same tax base.
And if you think this is only a problem for Chicago taxpayers, don’t worry — the bonds were issued on a tax-exempt basis. If you are a federal taxpayer, you are subsidizing this borrowing activity.
A Complete Absence of Professional Standards
In addition to the punishing terms of the borrowing, approximately no one involved in the deal had clean hands. CPS hired not one, but two, firms for each role in the offering —six separate law firms (not counting the underwriter’s counsel) and two financial advisors participated.
The total professional fees on this single transaction topped $9 million (number taken from final official statement). Unfortunately, it is not unusual for Chicago officials to treat bond offerings as an opportunity for their cronies to loot the city. According to the Sun-Times, Mayor Rahm Emanuel paid out $74.7 million in professional fees associated with the city’s bond sales in the last year alone (excluding interest — those professional fees were financed). That is money that cannot be invested in the actual business of running the city. Jones Day collected less for handling Detroit’s bankruptcy.
One of the more scandalous developments in the marketing of the bond issue was the decision to include language suggesting that the bonds would be protected as “special revenue bonds” in bankruptcy after initial attempts to sell the bonds failed a week earlier. In my opinion, the attorneys who drafted and signed off on this language should not be allowed to practice law going forward. Yes, that is an extreme reaction. But I think it matches the offense.
Who even buys these bonds?
A lot of toxic waste lurks out there, and more than a few funds were willing to take their clients’ hard earned money and put it into the CPS Ponzi scheme.
There’s much more in Culpepper’s scathing and well-deserved attack on the Chicago Public School System as well as a defense of Governor Bruce Rauner’s proposal to let the school system go bankrupt.
As I have said numerous times previously, the school district is bankrupt. All it takes is the Illinois legislature to allow what we already know to be the case.
Mike “Mish” Shedlock