CHICAGO Dec 8 A new type of debt for the
Chicago Public Schools (CPS) earned an investment-grade rating
of A from Fitch Ratings on Thursday, based on the bonds' ability
to withstand a potential bankruptcy filing by the financially
The A rating on $500 million of capital improvement tax bonds
is eight steps above the junk rating of B-plus with a negative
outlook Fitch has assigned the school system's $6.8 billion of
outstanding general obligation bonds.
Fitch attributed the difference to its assessment "that the
pledged revenues meet the definition of 'special revenues' under
the U.S. Bankruptcy Code and therefore, bondholders are legally
insulated from any operating risk of the board."
The United States' third-largest public school system is
struggling with pension payments that will jump to about $720
million this fiscal year from $676 million in fiscal 2016, as
well as drained reserves and debt dependency. The fiscal woes
have pushed its GO credit ratings deep into the junk category
and led investors to demand fat yields for its debt.
The $500 million of bonds will be secured solely by a
capital improvement property tax approved by the Chicago City
Council last year and not by the district's GO pledge. The
property tax revenue, initially totaling $45 million, can only
be used to fund capital projects and not operations, and is
subject to an intercept mechanism that will send the funds
directly to the bond trustee.
CPS cannot currently file for municipal bankruptcy in
Illinois, although there have been proposals to change state law
to allow such a move.
Fitch said legal opinions for the new bonds "provide a
reasonable basis for concluding that the tax revenues levied to
repay the bonds would be considered 'pledged special revenues.'"
The opinions on a "hypothetical bankruptcy" by CPS concluded
that payments on the new bonds would not be automatically
stopped by a federal bankruptcy court and that bondholders would
retain a lien on the tax revenue.
(Reporting By Karen Pierog; Editing by Jonathan Oatis)