A troubled Indiana school district plots bond market return

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Gary Community School Corp. in Indiana wants to test its access to the bond market with a $5 million bond refunding.

The school district, which has been under state-appointed emergency management since 2017, said the deal will refund four series of 2009 bonds that have about $5.1 million in outstanding principal.

The transaction could lower costs with an annual savings of about $32,000 and a net present value saving of about $280,000, said Eric Parish, executive vice president at MGT Consulting Group, the parent company of Gary Schools Recovery LLC, the firm managing the district under the state emergency setup.

He said that the refunding would also give the school district the opportunity to test the market.

He said the district has reduced its budget deficit to $11 million from $22 million. The school district has about $97 million in outstanding debt.

“The School Corporation continues to monitor its entire debt portfolio for refinancing opportunities for economic savings,” Parish said. “There are no other immediate refunding opportunities, but as the School Corporation continues to improve its financial condition it believes that as much as $40 million in lease financing obligations may be prime refunding candidates.”

Parish said in a presentation for the state’s Distressed Unit Appeals Board earlier this month that the refunding is in line with the district’s viable debt reduction plan and one of the means to reduce expenditures to eliminate the district's deficit and reduce debt.

“We need to test the market and find out what it thinks of Gary schools,” Parish said. “Refinancing the School Corporation’s debt portfolio for economic savings is one small piece in the recovery efforts.”

The district is working with James D. Shanahan, an attorney with Taft, Stettinius & Hollister LLP. Cender & Company LLC is the financial advisor and Fifth Third is the senior manager.

A Fifth Third representative speaking at the DUAB meeting said the district can expect to pay somewhere between 20 to 40 basis points more than other Indiana school corporations in the state that have an underlying rating ranging between A and A-plus.

Karl Cender, president of Cender & Co., said that the school district is seeking to qualify the bonds for the state intercept program.

“We are pretty confident that Gary school meets the requirements and should qualify for the state AA-plus rating on the intercept,” Cender said. “We think that given that rating we can still go into the market and get a very good rate on bond although it won’t be as high as schools that have underlying rating. Maybe in another couple of years as things improve financially with the schools we can maybe even get an underlying rating that would be investment grade and would be a help to future issues down the road.”

Parish said that the school corporation has not yet engaged in discussions with any rating agency on the possibility of obtaining a standalone rating.

Triet Nguyen, a managing partner at Axios Advisors LLC said the bond refunding should be successfully placed “primarily on the strength of the state intercept program.”

DUAB approved the resolution for the bond issue on April 11. The GCSC Emergency Manager is expected to approve the bond refunding on Thursday April 25.

Cender estimated that Gary could be back in the market as early as the middle of May, once rating agency discussions are complete.

To exit emergency management the deficit must be reduced to zero and the district must operate with a balanced budget for two years, at which point it can ask for state review to regain local control.

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School bonds Refunding bonds Indiana