CHICAGO — After years of selling its long-term debt through negotiated sales, the Cleveland Metropolitan School District opted to take competitive bids on its recent issue of $55 million of qualified school construction bonds.
CMSD officials said they were pleased with the result — a 5.2% interest rate that translates into a 0.26% rate after the federal subsidy is applied.
The direct-subsidy payment is equal to 100% of the lesser of the interest payments on the bonds or the tax credit rate that the Treasury Department sets daily. With the direct-payment rate set at 4.94% on the day of pricing, the subsidy will cover 95% of the district’s interest costs.
“The bids came in right where we projected,” said John Adams with Fifth Third Securities Inc., one of the district’s financial advisers. “The district is real happy with the interest rate.”
Adams added, however, that in the future the district will decide on a case-by-case basis whether to opt for a competitive or negotiated sale.
CMSD typically used negotiated sales on longer-term issues and competitive sales on its note deals. The decision to take competitive bids followed the advice of Sacramento-based American Governmental Financial Services Inc., which was hired by the district’s Bond Accountability Commission to review bond practices and recommend ways to lower costs for Cleveland taxpayers.
The firm recommended the district opt for a competitive sale instead of a negotiated sale when selling its general obligation debt. It also said to take advantage of the federal stimulus program by issuing qualified school construction bonds.
“For the local taxpayer it was a great deal,” James Darr, administrator of the bond accountability commission, said of the recent QSCB sale.
The district estimated that it saved $24.4 million in interest costs over the 16-year life of the bonds by issuing QSCBs, while Darr puts the savings around $17 million. “Either way that’s a great deal for the second-poorest big city in the nation,” Darr said.
The district awarded the issue to BMO Capital Markets, which offered the lowest interest rate, at 5.20%. Samuel A. Ramirez & Co. offered 5.23%, and Morgan Keegan & Co. offered 5.26%, according to Darr.
Issuance costs totaled $187,000, not including the cost of the district’s two financial advisory firms on the deal.
The bonds earned double-A ratings based on Ohio’s backing. The district’s underlying rating is BBB-plus by Standard & Poor’s, A-minus by Fitch Ratings, and A2 by Moody’s Investors Service.
