DALLAS – Denver Public Schools will convert all of its variable rate debt to fixed rate and pay $129 million in swap termination fees with proceeds from a $529 million deal expected to go to market Wednesday.
The 2013B certificates of participation are being issued to refinance and fix out $396 million of 2011A COPs and finance swap termination payments.
RBC Capital Markets is lead manager, according to Thomson Reuters.
Co-managers on this week’s deal include Goldman Sachs, JPMorgan, Loop Capital Markets and Wells Fargo. Kutak Rock is bond counsel.
Another issue of $58 million of Series C COPs will finance the construction and equipping of two new schools. That issue will price a week later through Piper Jaffray and Stifel Nicolaus.
This week’s deal completes the refinancing of a controversial variable-rate 2008 COP issue.
Through the 2011A and B COPs, the district converted its $750 million of Series 2008A and B variable-rate pension COPs to $400 million of Series 2011B fixed-rate pension COPs and $408.5 million Series 2011A in variable-rate mode with LOCs from JPMorgan Chase & Co., Wells Fargo Bank NA and RBC.
District officials at that time said the 2011 deal included $36 million for terminating a 2008 swap agreement.
Under the original deal, if interest rates had gone up, the banks would have been required to pay a termination payment, although DPS would have been paying a higher interest rate on the bonds. However, rates went down.
The new refunding will cost about $2 million per year in increased interest over 25 years. But school officials say that the 2008 COPs saved DPS about $50 million in interest.
To eliminate the risk of higher rates and lock in the current low rates, the school board decided to refinance the debt now, officials said.
The COPs are rated Aa3 by Moody’s Investors Service and AA by Fitch Ratings with stable outlooks. Standard & Poor’s does not rate the debt.
“The Aa3 rating primarily reflects the essential nature of the leased assets, manageable and affordable lease payments relative to general fund revenues and significantly, as well as the elimination of the district’s exposure to variable rate risks with the issuance of the 2013B COPs,” wrote Moody’s analyst Dan Steed.
The 2008 COPs were issued in the amount of $750 million to close a gap in the district’s pension fund for teachers. Amid the turmoil of the 2008 global financial crisis, interest rates that were projected at 5% spiked as high as 8.59%.
The 2008 COPs were insured by Financial Security Assurance Inc. — now Assured Guaranty Municipal Corp. — with a standby bond purchase agreement provided by Dexia Credit Local that expired in 2011.
Parent company Dexia Group, once the fourth-largest letter of credit provider, left the municipal market. The standby bond purchase agreement with Dexia was converted to letters of credit provided by JPMorgan, Royal Bank of Canada, and Wells Fargo.
After remarketing of the COPs failed in late 2008, they were successfully remarketed in mid-January 2009. Interest costs for fiscal 2009 exceeded the budget by about $24 million.
In addition to resolving its interest-rate risk, DPS is seeking to support its pension obligations through a merger with the Public Employees Retirement Association of Colorado. The merger was completed Jan. 1, 2010 after several unsuccessful attempts.
Before the merger, Denver Schools maintained an independent pension program, unlike every other school district in the state, which all belong to PERA.
Operating as a division of PERA, the district will continue to be responsible for its own unfunded pension liability and pension COPs, receiving an annual credit in its employer contribution rate for the payments on the PCOPs based on an 8.5% interest rate.
The district issued its first series of pension certificates in 1997 to fund the unfunded liability of its pension plan. Over the following decade, the funded ratio for the plan declined.
In April 2008, the district issued additional pension certificates to fully fund its pension. In conjunction with the 2008 pension COP issuance, the district’s board adopted a resolution to make full annual pension contributions going forward. Due to declines in investment portfolio values since 2008, DPS’s funding ratio was 81.5% in 2011 based on the market value of the pension assets and down from 88.9% the prior year.
The new money from next week’s Series C COPs will finance construction of two schools as well as street and athletic field improvements at a high school within the Stapleton redevelopment area, the site of the former Stapleton International Airport.
Through a reimbursement agreement between the district and the Denver Urban Renewal Authority, the base rental payments on the series 2013C COPs are expected to be fully supported by tax increment revenues from the Stapleton project.
To allow for additional incremental revenue growth at Stapleton, the 2013C COPs are structured with capitalized interest for the first three years.
“Fitch believes the prospects for full support from Stapleton’s incremental revenues are reasonable given that such revenues grew by 18% in fiscal 2013 due to the recent fixed-mill override,” wrote Fitch analyst Jose Acosta. “The 2013C base rental payments equal less than 1% of general fund spending, which Fitch believes would be manageable for the general fund if DURA’s incremental revenues are insufficient.”
Voters last November showed strong support for a $500 million bond program, and the school district was quick to go to market, with $466 million issued in December.
Proceeds of the general obligation bonds will fund district-wide improvements, renovations, new construction, and technology updates. Remaining authorization totals $21.4 million.
“The current overall debt burden is elevated at $7,322 per capita and 5.9% of full value, including $926.7 million in pension COPs,” Acosta noted. “The district’s GO principal pay-out rate is slightly below average with 44% maturing in 10 years.”
The district is the second-largest in the state behind suburban Jefferson County and has begun to grow after years of flat enrollment.
The financial profile has improved recently, as indicated by large operating surpluses in fiscal years 2010 and 2011, according to Fitch.
“Fitch also takes comfort in the district’s adoption of a formal fund balance policy in fiscal 2012 that targets an unassigned fund balance of 15% of spending,” Acosta wrote. “Fitch notes the effective financial cushion is currently at a solid level.”