CHICAGO — The Bloom-Carroll Local School District in Ohio last week completed one of the first negotiated sales of qualified school construction bonds to take advantage of the new direct-subsidy payment option for issuers.
By opting for the new payment mode, the school district effectively secured 0% financing for its $15 million, 15-year borrowing.
Stifel, Nicolaus & Co. was the underwriter on the deal. Peck, Shaffer & Williams LLP was bond counsel. GHB Financial Solutions LLC was the financial adviser.
A provision in the massive jobs bill signed into law by President Obama on March 18 allows issuers of QSCBs — and three other types of tax-credit bonds — to receive a direct-subsidy payment from the federal government instead of offering investors a tax credit.
In what might be the first direct-pay QSCB sale, Boston on March 25 competitively sold $17.425 million of taxable direct-pay QSCBs to UBS Financial Services with a TIC of 5.1791%, according to tm3.com. Those bonds mature through 2026 and are callable at par in 2020.
The tax credit failed to prove as popular as direct-subsidy Build America Bonds in part because the recession lowered investor interest in tax credits. Many issuers ended up having to offer supplemental interest coupons to boost yield and attract more buyers to the tax-credit bonds.
Issuers of the QSCBs that opt for the direct-pay mode will receive payments equal to the lesser of the actual interest rate of the bonds or the tax-credit rate for municipal tax-credit bonds, which the Treasury sets daily.
Last Wednesday, the Bloom-Carroll district priced $26.5 million of bonds, comprising $15 million of taxable, direct-pay QSCBs and $11.5 million of taxable, direct-pay BABs. The QSCBs captured an interest rate of 5.8%, just under the day’s tax-credit rate of 5.82%.
The government will cover 100% of the district’s interest costs. The finance team estimated the district saved roughly $2 million over 15 years by opting for the direct-subsidy payment instead of offering investors a tax credit, which they estimated would have probably required a 2% supplemental coupon.
“The issue was ready to go a month ago, and we put it on the shelf to wait for the new program to get enacted,” said Paul Luhmann, a senior vice president in Stifel’s St. Louis office. “There’s a much larger buyer demand for [taxable QSCBs versus the tax-credit bonds], and [the finance team] advised that they wait a month in the hope that they could save 175 to 200 basis points.”
The $15 million was the maximum amount the district was allowed to issue under Ohio’s QSCB allocation, and the 15-year maturity was the maximum maturity allowed under federal rules, bankers said.
“At 0% financing, we wanted to go as long as we could,” Luhmann said.
The school district plans to establish a sinking fund, making annual deposits of roughly $1 million to reach $15 million by the time the bonds, which have a bullet maturity, come due in 2025. The sinking fund yield is limited to 4.39%, under federal rules for the program.
Estimating a return of roughly 3% on the sinking fund, the finance team expects the all-in total interest cost for the QSCBs to total negative 2.342%. The all-in TIC for the full $26.4 million financing is expected to total 1.957%.
Stifel has several other issuers lined up waiting to take advantage of the new plan, including two districts in Ohio and one in Michigan, said Alan Baucco, in the firm’s Cleveland office.
“Over the next few weeks I wouldn’t be surprised if a few of these issues waiting to come into the market [are priced],” he said. “We’ve been holding back a few other issues.”
Bloom-Carroll, located about 20 miles outside Columbus, will use proceeds from the bond issue to build a new middle school and renovate existing facilities.
The district is part of the Ohio School Facilities Commission’s Expedited Local Partnership Program, under which the state contributes to a district’s capital costs. The district’s master plan totals nearly $60 million. The state will contribute about $10 million, and the district will seek voter approval to issuing the remaining $23.5 million in the future.
Boston was advised on its sale by Public Financial Management.
