SAN FRANCISCO — A pending transaction to help finance a new cathedral for the Diocese of Oakland exemplifies the increasing sophistication many Roman Catholic dioceses are employing in their approach to capital finance, according to the transaction’s financial adviser.
The Oakland Diocese plans to borrow $110 million through a taxable bond to be privately placed with Deutsche Bank, though details and structure of the deal were still being negotiated this week.
“The primary focus of our current financial plan is to essentially refinance some existing debt that we have and to provide sufficient construction financing for completion of the cathedral,” said Michael Canizzaro, director of financial services for the diocese.
The largest share of the borrowing will go toward financing the new Cathedral of Christ the Light, under construction in downtown Oakland. Set to open next year at a total cost of $190 million, the new cathedral will replace the diocese’s former cathedral, irreparably damaged in the 1989 Loma Prieta earthquake and ultimately demolished.
The financing represents a new approach to long-term capital planning for the diocese,
according to Patrick O’Meara, managing director of financial adviser O’Meara Ferguson Kearns Inc., which specializes in advising Catholic institutions.
Historically, dioceses and Catholic institutions have saved up money in advance to pay cash for necessary capital projects, he said. The cathedral financing reflects a growing willingness among Catholic dioceses to use the capital markets to their advantage, O’Meara said.
“They’re building hundred-year assets and they don’t have to pay for it cash on the barrelhead,” he said. “Even if they can pay for it cash on the barrelhead, that is probably not the best use of their liquidity.”
The transaction is taxable, as much of it will be used to finance a church sanctuary. But after squaring away financing and construction of the cathedral, the Oakland diocese will consider tax-exempt financing for its other capital needs, particularly education.
The diocese, which serves Alameda and Contra Costa counties on the East Bay side of the San Francisco region, operates 56 schools with almost 20,000 students.
“We hope to be able to use this type of [debt] facility in the future and we’ll certainly explore the feasibility of doing so as time goes by,” Canizzaro said.
A bond issue for the Archdiocese of Indianapolis in 1996 is believed to be the first in which a U.S. Catholic diocese issued tax-exempt debt after obtaining its own underlying credit rating, according to The Bond Buyer’s archives.
The pace has quickened since a 2005 tax-exempt issuance for the Diocese of Austin, in which O’Meara’s firm was financial adviser.“The sophistication of Catholic health care is moving into diocesan management,” he said.
While the organizational structure of Catholic institutions has served them well for a long time, O’Meara said that it takes some effort to explain it and translate it into terms Wall Street understands.
Typically, in a Catholic diocese, the organizational responsibility is pushed down as close to street level as possible, he said — a concept called subsidiarity.
“When a parish school runs into problems, they don’t call downtown; they fix it themselves,” O’Meara said.
Historically, that is one of the strengths of parochial schools and other church affiliated organizations, he said. “It creates enormous family involvement and community involvement with those schools,” O’Meara said.
At the same time, the autonomy of the various operations within a diocese isn’t necessarily easy to explain to, say, a rating agency.
In a given diocese, there may be individual financial statements from dozens of parishes and schools, O’Meara said.
“The information is out there,” he said. “Aggregating it, standardizing it, and making it meaningful is a Herculean task.”
O’Meara said his firm, based in Virginia, helps build bridges between Catholic institutions and the capital markets.
“We know that there are many more smart guys at Lehman [Brothers], Goldman [Sachs & Co.], and Merrill [Lynch & Co.], you name it, than reside at OFK,” he said.
O’Meara Ferguson Kearns exists to provide church organizations the tools to access that advice, and to help capital market participants understand the operations of the church, O’Meara said.
“Lehman, Goldman, and those guys weren’t attuned to the clients enough to give it,” he said. “They weren’t speaking the same language.”
Moody’s Investors Service in October assigned the Oakland diocese an A3 issuer rating in connection with the forthcoming bond placement.
“Moody’s believes that the Diocese of Oakland’s long-established presence in the East Bay region provides a fundamental credit strength that underpins the A3 rating, with continued philanthropic support and revenue growth,” according to the rating report.
The report cites the diocese’s favorable financial operating performance, effective centralized financial management, and a solid fundraising profile.
The Moody’s report also includes a thorough discussion of the diocese’s potential exposure to litigation claims of sexual misconduct by priests or staff. However, the agency believes most or all claims predating 2003 have been resolved through a $56 million settlement in 2005, though there is no guarantee that other suits may not emerge.
“The Diocese of Oakland has been a leader in dealing with claims of sexual abuse from clergy and other Diocesan-employees or volunteers,” according to Moody’s.
The Oakland diocese was formed in 1962, when Alameda and Contra Costa counties were split from the San Francisco archdiocese. The Cathedral of Christ the Light will be its first purpose-built cathedral; the previous cathedral had been built as a church in the late 19th century, long before the diocese was formed in 1962.
According to a publication of the diocese, there have been more than $100 million in gifts and pledges toward construction of the new, $190 million cathedral. The diocese has contributed $26 million and taken about $15 million in loans for the project.
It expects to raise more money by selling properties that currently house facilities that will be moved to the cathedral.
