DALLAS — As the debut year for Build America Bonds nears its close, Denver Public Schools is joining other large issuers in the market this week with $225 million of the taxable debt, along with $24 million of tax-exempt refunding bonds.
The negotiated deal, led by George K. Baum & Co., comes the same week as the University of Colorado expects to issue $225 million of BABs through senior manager RBC Capital Markets.
Those deals are dwarfed by New York City’s $616.1 million offering, the District of Columbia’s $600 million sale, and the Massachusetts School Building Authority’s $500 million BAB deal this week.
Since President Obama signed the American Recovery and Reinvestment Act into law in Denver Feb. 17, nearly $58 billion of BABs authorized under the legislation have been issued, averaging nearly $6.6 billion per month. November’s 100 BAB issues were worth $7.57 billion.
DPS, which issues debt as Denver School District No. 1, won voter approval for $454 million of bonds in November 2008.
So far, the district has issued only $174 million of general obligation bonds under its five-year capital improvement program. The district expects to issue the remainder of the authorized debt by 2012.
Bea Chiem, primary credit analyst for Standard & Poor’s, cited the credit strengths of the district: a broad economic base, adequate general fund balances and financial management practices, and low overall net debt burden as a percentage of estimated market value.
“An offsetting weakness is a state funding formula that limits the school district’s revenue-raising ability, combined with a pending state budget deficit and competition for enrollment from charter schools, although the district is expecting a surge in enrollment based on recent data,” Chiem wrote.
With the proceeds of this deal, DPS plans to replace more than 100 roofs in the aging district and renovate other schools. The capital plan devotes $40 million to renovating the historic North High School built in 1911. North is one of the four original high schools in the city, along with East, West, and South, all bearing classic designs.
The new bonds have issuer credit ratings of AA-minus from Standard & Poor’s and Aa3 from Moody’s Investors Service.
In addition to a pledge of district tax revenue, the bonds are supported by a pledge from Colorado of debt service if DPS cannot make its payments in full.
In passing the bond proposal on a long ballot that included the presidential election, Denver voters continued a 30-year tradition in approving school bonds. Then-superintendent Michael Bennet called the two-to-one margin in favor of the bonds “incredibly gratifying.”
Bennet was later appointed U.S. senator when Sen. Ken Salazar, D-Colo., left his seat to join the Obama cabinet as secretary of the interior. Denver also hosted the Democratic Presidential Convention that nominated Obama to the presidency.
Last month, First Lady Michelle Obama visited South High School as part of the White House leadership and mentoring program.
The $454 million bond issue was the largest ever sought by a Colorado school district, and the largest ever approved. Despite the size of the issue, the district’s bond committee has identified another $600 million of projects that need to be funded in the future.
DPSalso benefits from several mill-levy overrides, which, with voter approval, allow a school district to generate local property tax revenue in excess of state funding, according to Standard & Poor’s analysts. A mill-levy override is restricted to about 20% of a district’s base state funding.
Standard & Poor’s considers DPS’ net debt before this issue “low” at 2.6% estimated market value and a “moderate” $3,503 per capita, excluding certificates of participation. Including the COPs, the overall net debt burden would be 3.3% of preliminary estimated market value, which reached $83.2 billion for fiscal 2010, analysts note.
The district’s taxable net assessed value rose to $11.3 billion, an 11.4% increase from the prior year. Following this issuance, the district will have $55.8 million remaining on the 2008 authorization and expects to issue this prior to 2012.
The district’s outstanding COPs include $750 million of Series 2008A and B pension certificates issued in variable-rate mode and insured by Financial Security Assurance Inc., now Assured Guaranty Municipal Corp., with a standby bond purchase agreement by Dexia Credit Local. Remarketing of the COPs failed in late 2008, but succeeded in mid-January 2009. Interest costs for fiscal 2009 exceeded budget by about $24 million.
DPS also entered into several synthetic fixed-rate swap agreements to pay 4.859% interest and receive a floating rate equal to 100% of the one-month London Interbank Offered Rate. The district’s recent all-in costs, including the spread over one-month Libor, and remarketing and letter-of-credit fees have been as high as 7.1%, but this is still under its budgeted interest cost of 7.5%, according to the district. Rates are reset weekly.
JPMorgan Chase Bank is the swap counterparty for Series 2008A, Bank of America is counterparty to Series 2008B-1, and Royal Bank of Canada is counterparty to Series 2008B-2. A downgrade of DPS, its bond insurer, or its liquidity provider does not trigger an automatic termination, the district says.
“Although management lacks a specific policy on its level of desired variable-rate debt exposure or specific swap minimum collateral requirements, it has various favorable swap management policies,” Standard & Poor’s analysts wrote.
Covering 155 square miles, the district shares boundaries with the city and county of Denver and has an estimated population of 600,000 in a metropolitan area of 2.7 million. With its boundaries limited by state law, Denver’s population grows at a slower rate than that of its suburbs.
“In 2008, the city’s median household effective buying income was good, in our opinion, at 90% of the national level, while its per-capita effective buying income was in our view good at 107%,” Standard & Poor’s wrote.