ALAMEDA — A California charter school effectively borrowed 10-year money interest free this week, in what is believed to be the first qualified school construction bond deal by a California charter.
The $12 million issue for High Tech High, an established charter school organization in San Diego County, priced Tuesday with a 10-year bullet maturity yielding 5.04%, said Bill Wildman, managing director at underwriter RBC Capital Markets.
The California School Finance Authority was conduit issuer.
The transaction carried a AAA rating from Standard & Poor’s due to a standby letter of credit agreement from the Federal Home Loan Bank of San Francisco.
Under the Housing and Economic Recovery Act of 2008, the federal home loan banks — which were formed by Congress in 1932 to provide liquidity to the housing market — are authorized to provide letters of credit to non-housing municipal bonds through 2010.
High Tech High aims to advance the timetable for its project, which will add elementary and middle-school facilities to an existing high school campus in Chula Vista, said chief financial officer Kay McElrath.
The organization operates nine charter schools with about 3,500 students.
The catalyst to get the deal done now, she said, was the changes Congress made to the QSCB program in March, expanding what began as a tax-credit program by allowing issuers to sell taxable bonds and receive Build America Bond-style direct payments from the Treasury.
“As tax-credit deals, it was going to be really hard to do a charter school QSCB, even with the [letter of credit] wrap,” Wildman said. “When they changed the law and they became subsidy bonds all of the sudden it became a much more marketable security.”
The deal sold to buyers like insurance companies and bond funds, he said.
The final 5.045% yield came in below the federal QSCB subsidy level.
“It’s really interest-free financing for the school,” Wildman said.
“We really felt it was not only the appropriate time to move, but that if we missed our opportunity we’d kick ourselves for a long time,” said McElrath.
The CFO said the scale and timing of the financing opportunity also encouraged two philanthropists to step up and contribute $8 million to the $20 million project.
“Had we not really had these really amazing terms that were available through the qualified school construction bonds, I don’t know if we would have been able to get donors to step up at this time,” McElrath said.
The bonds carry a letter of credit from City National Bank, a regional bank headquartered in Los Angeles, and a standby letter of credit from the San Francisco FHLB.
City National Bank makes the interest payments on the bonds, and federal subsidy payments reimburse the bank, according to Wildman.
The credit is further bolstered by an intercept mechanism. The California Controller’s Office directly intercepts state aid payments and forwards the amount necessary for debt service to the bond trustee, Bank of New York Mellon Trust Co.
The bonds have a single, 10-year bullet maturity, though the charter school will make sinking-fund principal payments on a schedule that retires the debt in 10 years, Wildman said.
“This is a 10-year deal because that’s the longest you can get from a federal home loan bank,” he said.
Construction will begin as soon as the deal closes, McElrath said.
Because site grading and utility work was done when the adjacent high school was built in 2008, the elementary and middle schools are expected to be open for the beginning of the 2011-12 school year. They will accommodate more than 700 students.
The California state government received $773.5 million in QSCB allocation in 2009, in addition to direct allocations made directly to several large school districts in the state.
Of that total, the state earmarked $73.5 million for charters, to be distributed by the California School Finance Authority, chaired by state Treasurer Bill Lockyer.
The CSFA has a unique role, both as an allocator and conduit issuer for charter school QSCBs, said spokesman Joe DeAnda.
The High Tech High deal is the first QSCB deal from the authority to make it to the market, but more are on the way, he said.
Six other charter schools have received QSCB allocations from the School Finance Authority, with four more allocation requests expected in August.
The state’s qualified school construction bond process ran into a hitch in 2009, when bond lawyers raised a number of questions about the way the allocations were decided.
In March, California lawmakers addressed those concerns by adopting a bill ratifying the state’s QSCB selection process.