by Mish

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

“B” Word Hits Chicago: Illinois Governor Proposes Bankruptcy for Chicago Public School System

At long last, Illinois has a sensible proposal to help Chicago schools: Bankruptcy.

Chicago on Brink of Bond Market Shutoff: Tax-Exempt Yield Hits Stunning 8.50%

Verge of a Bond Market Shutoff. The Chicago Board of Education is on the verge of a bond market shutoff.

Chicago Headed for Insolvency, Get the Hell Out Now

Chicago Mayor Lori Lightfoot and the Teachers Union reached agreement on a deal sure to send Chicago over the cliff.

CNBC’s Santelli and Mish Discuss Municipal Bonds; Egan-Jones on Chicago; S&P Blames Moody’s

I was back on CNBC with Rick Santelli on Tuesday May 19. The topic once again was municipal bonds with a spotlight on Chicago. Here are a pair of videos.

Chicago Pension Situation Improving Says Mayor: Careful Analysis Uncovers Lies

Chicago Mayor Rahm Emanuel brags about balancing the Chicago budget and fixing the city’s pension plans. Reuters writer Dave McKinney took the lies hook line and sinker.

Alleged “Bond Shortage” as Japan Cruises Towards One “Quadrillion” Yen of Negative-Yielding Bonds

Bond Shortage! On Friday, yield on Japanese 10-year bonds hit a record low -0.135%. According to Bloomberg, the chief strategist of Bank of America Merrill Lynch in Tokyo stated those 10-year bonds look “relatively cheap”.

Chicago's Death Spiral: There's No Can Left to Kick

Chicago Mayor Lori Lightfoot has presented her plan of tax hikes and can kicking. It can't possibly work.

Chicago Teachers Union Goes to Venezuela, Praises Maduro for Not Closing Schools

Four Chicago Teachers Union representatives went to Venezuela, a failed nation, singing praises of its corrupt leader.

Bond Market Paralysis: What Happens When Central Banks Own the Market? Mish’s Sure-Fire Proposal

Here’s the question of the day: What happens when central banks own the market? The answer comes from Asia where Japan’s Government Bond Market Grinds to a Halt and the yield on 10-year Japanese bonds did not move for seven days.