Market conditions bring savings to Philadelphia School District

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Improved market conditions for issuers and pair of rating upgrades meant millions in savings for the Philadelphia School District in a bond deal that priced last week.

Pennsylvania’s largest school system saw total interest costs of 3.086% for its $604.9 million negotiated deal led by Bank of America Merrill Lynch Thursday compared to a 3.7% rate for March 2018 deal, according to the district’s CFO, Uri Monson.

The 2018 deal followed a two-notch upgrade from Moody’s Investors Service that moved the district to investment-grade Baa3. Last week's deal followed a Fitch upgrade of the district's issuer default rating to the highest speculative grade.

The district's spreads to market benchmarks were lower than in its 2018 deal, which were even lower than a 2016 deal, the district said in a news release.

“We had a strong positive response to all of our transactions with over $6 billion in orders for $1.1 billion in bonds,” Monson said in a statement. “The result is lower interest costs so we can invest more of our funds in meeting the core mission of educating the students of Philadelphia.”

Monson said the district took advantage of favorable market conditions to refund nearly $340 million in existing GO bonds and State Public School Building Authority Lease Revenue debt.

The Moody’s upgrade to Baa3 from junk-level Ba2 came after a new mayor-appointed school board took effect in July 2018 after more than 16 years of state control, which restored the district to investment grade for the first time since 1977.

The district generated $530 million for its capital improvement program from the Oct. 18 bond sale that will be used for various infrastructure improvements. This included $30 million of green bonds that will be dedicated to energy efficiency projects at facilities across the District.

“These funds will allow us to address capacity issues that we have, so that we’re able to better manage the many projects that we’re working to complete in our schools,” Dr. William R. Hite, superintendent of Philadelphia School District, said in a statement.

District officials also refunded short-term tax and revenue anticipation notes and issued its first public TRAN in a decade through a $347 million offering led by Goldman Sachs. The TRANs priced at a yield of 1.42%, well below the budgeted figure, according to Monson, and the district reduced the principal borrowing amount by $25 million. More than $7 million in savings were achieved from what was budgeted during the current 2020 fiscal year.

The Philadelphia board of education approved the bond transactions at its October meeting where it also gave the school district authority to unwind its last remaining basis swaps.

The interest-rate swap agreements constitute the biggest risk to the district’s debt portfolio, according to Moody’s and Fitch.

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Primary bond market School bonds Refunding bonds School District of Philadelphia Pennsylvania