Fitch ‘junk’ downgrade for Chicago Board of Education highlights fantasy bond ratings
Chicago will continue to slide down the ratings table.
Fitch Ratings downgraded Chicago Board of Education general obligation bonds to “junk” status on July 27. Here are the factors Fitch considered when downgrading:
- Continued financial stress
- Dependency on borrowing
- Cash-flow drain
- Pension liability weakness
- Poor labor history
- Unfavorable debt position
- Structural imbalances
- Mounting fixed costs
- Limited options to address large budgetary gaps
- Growing gap for fiscal year 2016
- Liquidity concerns
- Negative cash balances
- Swap termination triggers
The ‘j’ word
The downgrade from “BBB-“ to “BB+” is a downgrade to a “non-investment” rating, commonly labeled “junk.” Curiously, MarketWatch just could not bear to say it.
MarketWatch reports, “Fitch would downgrade the rating further if there is not clear and meaningful progress over the next several months in reducing the large structural imbalance.”
I think we can count on that.
Deep into junk
On May 20, I asked Sean Egan at the rating agency Egan-Jones about how he would rate these bonds. “Deep into junk,” he replied.
S&P still holding out
On July 2, Standard & Poor’s cut the Chicago Board of Education’s rating to “BBB,” which is still investment grade.
And on July 8, S&P lowered Chicago general obligation bonds one notch to “BBB-plus,” also investment grade.
When S&P comes to its senses remains to be seen, but I suspect quickly.
For a discussion of how the Securities Exchange Commission is to blame for the current environment of fantasy bond ratings, click here.
Mayor not helping the situation
Instead of tackling the underlying problems, Chicago Mayor Rahm Emanuel nickel-and-dimes businesses to death, further makes Chicago an uncompetitive place to do business and threatens massive property-tax hikes. Emanuel also expects $500 million from the state even though the state budget, which Gov. Bruce Rauner correctly refuses to sign, is $4 billion in the hole.