The Edwardsville, Ill., District 7 Board of Education is looking at refinancing bonds issued in 2007. By taking advantage of lower interest rates, the refinancing of these bonds is projected to save $731,000 and extend total debt payments out one year.
Thomas Crabtree, a director with Stifel Financial Corporation in St. Louis, presented the board Tuesday night with an overview of the district’s outstanding debt, the corresponding bond interest levy of the district and how the bond refinancing would impact the district.
Crabtree pointed out that he’d been focusing on the district’s Series 2007 B bonds issued at an original par of $94,782, 216 and that they were referred to as current interest bonds — that they pay in interest coupon every six months and have a call feature. The call feature on these Series 2007B bonds is Dec. 1, 2017.
“It’s important to note that with municipal bonds the typical call feature means that for a certain amount of time — typically 10 years — the bonds cannot be called away from investors. So we always liken it to a mortgage,” Crabtree explained. “And unlike a mortgage, if the district were to win a lottery which isn’t really possible, but if the district were to win a lottery, you can’t just repay your loan at any time. You have to wait at least until that time period.”
“You can occasionally one time in advance of that call feature refund those on a tax exempt basis but you only get to do that once so we really covet that opportunity, and we’ve been watching and waiting for this call feature to come available. Otherwise there’s a mathematical penalty that’s involved....” Crabtree added. “Suffice to say that once we have come upon this call feature, all penalties are negated and the opportunity to refinance is upon us, and if you wait any longer, assuming interest rates stay the same or go up, you actually end up incurring more costs rather than achieving the savings.”
Because the old bond interest rates were higher than the current interest rates, Crabtree noted that the refinancing offered “icing on the cake to achieve savings” through the district realizing a $731,000 savings. “I say that’s icing on the cake because if you’ll think back, these are 2007 bonds issued 10 years ago. The economy and our outlook on the future at that time was very different. We expected and were experiencing significant growth in the district in the EAV in the district. The planning, (which) at that time was very reasonable, was that that growth would continue,” he recalled. “Unfortunately, just a year later in 2008, the economy took a significant turn and in turn property values went down and have done so for many years after that. So now we have the opportunity to re-look at that expectation of growth going forward.”
He also noted that one of the district’s bonds was an interest bond whose interest rate had to increase every year over the past seven years to accommodate the increase in payments. “And that’s because we expected the property values to increase more significantly than they have. So we had to have increases over time to keep up with those payments and that’s partially what we are going to address - existing debt service and bond and interest rate,” Crabtree said. “In it’s current form there are significant increases in that expected rate over time to keep up with those payments because we did expect at that time, 10 years ago, the EAV would increase much more significantly than we do now.”
Crabtree emphasized that overall the district would be addressing the rate increases by refinancing and extending those payments out.
“We have now moved down from — what I believe at the time in 2007 was — a 7 percent annual growth rate – again that was reasonable at the time because we were experiencing even more growth than that and we had hoped that would be conservative,” Crabtree added. “But now, given the change in landscape, we’ve moved that down to a much more reasonable — in even today’s standards — a 2 percent growth rate. Fortunately last year we did experience even more than that and that will only help our cause…..”
He summarized saying that the two goals they were looking at were managing the tax rate first and capitalizing on the lower interest rates which provides the “icing on the cake. …interest rates are so low at this time that even though we are extending the repayment of those bonds — only one year longer than all of your current debt is today but it is an extension — and we’re still able to achieve a present value savings in today’s dollars. That’s after all the costs….” Crabtree said. “So I could very well be standing here tonight talking about this plan and it would be at a cost. And that would be a very reasonable thing to do because we are in a very different landscape and we need to address those sharp increases to the community. It’s only that interest rates are so low today that we can actually talk about enjoying savings as of today – and it literally changes from day to day – of $731,000.”
The district also has three additional bond issues that are callable in the future — in 2021 and 2025.
