DASNY Adopts New Borrowing Rules for Lower-Rated Credits

The Dormitory Authority of the State of New York adopted new borrowing guidelines for lower-rated credits at its monthly board meeting yesterday. DASNY’s board also gave final approval to $1.43 billion of bonds, mostly on behalf of the state.

Under the old guidelines, a borrower needed to have either an unenhanced rating of A1/A-plus or greater or have credit enhancement such as bond insurance, State of New York Mortgage Agency mortgage insurance, or a letter of credit. DASNY could and did make exceptions for lower-rated and unrated credits, but exceptions won’t be necessary under the new guidelines.

Nonprofit entities, except for health care institutions, that have a rating of Aa3/AA-minus can borrow with a general obligation pledge and an agreement to retain a “qualified management consult” in the event they are downgraded to A1/A-plus.

If the institution has a rating between Baa3/BBB-minus and A1/A-plus, they have to go further, using not only the general obligation pledge of the entity, but also a revenue pledge subject to DASNY approval and financial covenants including restrictions on pledging assets and additional borrowing. In some cases they will also need a mortgage on real estate and a debt service reserve fund.

For health care nonprofits, borrowers are classified as either having an investment-grade rating or not having one. Those with an investment-grade rating are subject to the same rules as non-health care borrowers that have a rating below A1/A-plus.

Nonprofit borrowers of any kind that are either unrated or have a junk rating have to either have credit enhancement or be privately placed with a qualified institution. In a private placement, the bonds must be sold in denominations of at least $100,000 for investment purposes and can only be transferred or sold to other qualified institutional buyers.

In general, DASNY can only sell bonds on behalf nonprofits that are either higher education or health care institutions, but it can sell on behalf of other nonprofits if special legislation is passed. DASNY has sought legislation that will allow it to sell on behalf of any 501(c)(3).

Two institutions that received special legislation so that DASNY could sell bonds on their behalf are Friends Academy, a private pre-school through 12th grade school in Locust Valley in Long Island, and Fordham Preparatory School in the Bronx.

Both schools are unrated and plan to each privately place $6.5 million of bank-qualified bonds with Brown Brothers Harriman & Co.

The bank has agreed to hold the bonds for five years after which time they can be redeemed.

DASNY also approved $1 billion of personal income tax bonds on behalf of the state that are expected to price early next year.

The bond proceeds will be used to refund mental services facilities bonds issued in 2003, fund an association’s $40 million swap termination fee, fund $270 of projects on behalf of the New York State Environmental Facilities Corp. and reimburse the state for certain health care grants.

Other financings that received final approval included $330 million of refunding bonds for the state’s Mental Health Services Facilities Improvement Program, $18 million of bonds for the Northern Westchester Hospital Association, and $55 million of bonds for Marymount Manhattan College. Cornell University received preliminary approval for $282.6 million of bonds.

DASNY also appointed a new chief financial officer and treasurer. Paul Kutey will replace John Pasicznyk, who is taking on new duties as managing director of construction and metro New York operations.

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