CHICAGO — Michigan-based Kalamazoo College this week is privately placing $36.4 million of bonds, a move that will raise new money and take all of its bonds off the public market to escape a bond covenant that has grown too restrictive.
The school will pay a penalty for the refinancing, but felt forced to do so in light of recent accounting-rule changes and concerns about future debt-service coverage given current long-term interest rates, officials said. The combination of the two would likely have led to a violation of the bond covenants within the next few years, according to Jim Prince, the college’s vice president for business and finance.
“From a financial standpoint, it doesn’t make much sense — but it sure makes a lot of financial sense to us when you think of the risk going forward of being able to meet our covenants,” he said.
The alternative, asking bondholders to allow the college to revise its covenants , would likely have cost more than the refinancing, Prince said. “They wouldn’t have done it for free,” he said. “So our board determined it was best to clean it all up.”
The $36.4 million issue is a mix of taxables and tax-exempts that includes $12 million of new money with the rest used to refund bonds sold in 2000, 2003 and 2007. The debt will be privately placed with PNC Bank, and is structured as 10-year fixed-rate bonds. After 10 years, the term could be extended or the bonds will be subject to remarketing or refinancing.
Prince said the school expects to save about $5 million over 10 years by doing a private placement rather than selling a 30-year fixed-rate issue. The college will pay PNC 3.89% on the tax-exempt bonds and 2.44% on the taxable bonds.
Part of the problem comes from a new accounting rule under the Uniform Management of Institutional Funds Act for colleges and universities, which prohibits the school from counting certain accounts as unrestricted.
The regulation pressured the school’s debt coverage ratio test, Prince said. The college may have been able to reach its covenant ratio requirement of 110% debt service coverage by the end of the year, but was certain to violate its three-year cumulative test.
The new covenant with PNC allows the school to use both its minimum unrestricted and temporarily unrestricted cash and investment accounts to provide long-term debt of 1.0 times and an additional bonds test of 1.0, said Moody’s Investors Service, which affirmed its A1 and stable outlook ahead of the private placement.
“There are a lot of other institutions in our boat; we’re not alone in this,” Prince said.