$100M Soft-Put Bonds Aid Growing Texas District

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DALLAS – San Antonio’s Northside Independent School District will price $100 million of bonds Wednesday with soft-put features that are considered somewhat novel among Texas school districts.

Although the bonds are identified as variable-rate debt in the preliminary official statement, the rates are actually fixed until they are remarketed five years later, according to John Hall, director for the underwriter Baird.

The bonds can be remarketed again as put bonds or long-term fixed-rate after five years, Hall said.

“I think of it as a short-term fixed rate,” Hall said of the put feature.   Because the rates will change over the duration of the bonds, the issuer can identify them as variable-rate debt, he added.

“The soft put structure allows us to take advantage of short end of yield curve and reduce the cost of borrowing by not having a liquidity facility,” said Oscar Cardenas, chief financial officer for the district. “We believe the terms of our agreement with the underwriter give us the flexibility to negotiate a successful remarketing now or at the end of the initial period and anytime thereafter.”

Northside is one of the few school districts in Texas that can issue soft-put bonds or variable-rate debt that retains the backing of the Texas Permanent School Fund, Hall said. 

The PSF provides triple-A status for the district, whose underlying ratings are AA from Standard & Poor’s, Aa1 from Moody’s Investors Service and AA-plus from Fitch Ratings.

Attorney Clayton Binford at Fulbright & Jaworski ascertained the PSF backing as bond counsel on the deal.

With the addition of three offices in Texas last year, including San Antonio, Baird is rapidly expanding its share of the market, particularly in school districts.  Ajay Thomas, Baird’s managing director for Texas, guided Northside’s soft-put issue in 2008 when he was at Morgan Stanley.

“We started using this structure when liquidity facilities became expensive, especially since our rating was better than most liquidity providers,” Cardenas said. “We have been successfully using this structure for the last four years.”

Although the PSF guarantee would remain in place in the event of a failed remarketing, “a lot of fail-safes would have to fall by the wayside for that to take place,” according to one person involved in the deal who asked not to be named.

The likelihood of another financial upheaval like that of 2008 is considered remote.

In the event that the remarketing did fail, the stepped rate would only rise to about 6.5%, much lower than the 10% stepped rate in the 2008 deal, Hall noted.  The PSF guarantee is one factor in that, he said.

“That’s the beauty of the issue in the market,” Hall said.  “There’s not a lot of triple-A issues at that duration.”

Nonetheless, any firm selling the bonds “may have to do a lot more on a sales call explaining the nuances of it,” he said.

Located in suburban San Antonio, Northside ISD is the fourth largest school system in Texas.

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