CPS must peddle gold-plated junk bonds

Crain's Chicago Business reports:

Forrest Claypool's plan to keep Chicago Public Schools afloat by selling more than $1 billion in bonds will require buying the love of investors with soaring interest rates.

Bond buyers, typically conservative types, could shut the junk-rated CPS out of the market, the way they did more than 25 years ago amid another financial crisis.

Yet to the good fortune of the new CEO of CPS, the bond market has changed. Hedge funds and high-yield bond funds, which specialize in troubled debt, are showing a strong appetite for junk government bonds, despite high-profile failures like Detroit and Puerto Rico.

CPS, with $6.50 billion in long-term debt, would seem to be a good candidate to join that list. Without a pension bailout, the district has said it could run out of money to pay its bills this school year as it struggles with a current-year budget deficit of $1.1 billion.

In exchange for providing badly needed cash, investors are likely to demand to be compensated for the perceived risks.

“The expectation is that there will be a market for CPS' debt, but it is going to come at a very significant premium,” says Laurence Msall, president of the Civic Federation, a Chicago-based fiscal policy group.

Indeed, when the city of Chicago issued tax-exempt bonds in July, the yield, or return on investment, was 2.74 percentage points higher than the yield on bonds sold by local governments with top credit ratings, according to Thomson Reuters Municipal Market Monitor data analyzed by Crain's.

Progressives call public education an "investment". Investment for whom?