Charter schools and the Build America Bond market still have yet to merge after book-runner PNC switched gears in a recent $33.7 million sale for Sabis International Charter School and ended up pricing traditional tax-exempt bonds rather than the BABs they had originally planned.
Bankers at PNC said investors shied away from BABs on the transaction due in part to limited charter-school liquidity and name recognition. In the end, tax-exempt financing won out as the cheaper borrowing tool, since the necessary yields to attract taxable investors were too high for Massachusetts-based Sabis.
Even with the 35% subsidy, tax-exempt bonds were a more cost-effective plan of finance, said Shahin Zandfard, senior managing director for municipal trading, underwriting, and remarketing at PNC.
“We were in discussions with investors and we even got to credit spreads of 600 basis points over Treasuries and they wanted wider [yield] before they would even look at it,” Zandfard said. “And from that tone we basically realized that we’re better off going with tried and true. But also, even based on the 35% subsidy, those numbers wouldn’t make sense.”
The Massachusetts Development Finance Agency sold the debt on behalf of Sabis, which Standard & Poor’s rates BBB with a stable outlook. Moody’s Investors Service and Fitch Ratings do not rate the school. Edwards Angell Palmer & Dodge LLP is bond counsel. Daroth Capital Advisors LLC is Sabis’ financial adviser.
The transaction priced on June 18. The sale included $275,000 of taxable bonds maturing in 2010, and the remaining debt was offered as tax-exempt bonds with serial maturities ranging from 2011 through 2039. Yields were 8% with an 8% coupon in 2010 on the taxable portion and from 4.25% with a 4.125% coupon in 2011 to 7.65% with an 8% coupon in 2039.
Zandfard said BAB investors, so far, have become familiar with well-known entities like the New Jersey Turnpike Authority, which offered bullet maturities in its $1.37 billion BAB deal to attract a larger base of institutional investors, and smaller BAB deals that are serialized and marketed to a different sub-category of buyers.
“But what’s common among all of those is that they are all higher-rated, more liquid names,” Zandfard said. “Charter schools, even in the tax-exempt sector, have very limited liquidity in the secondary. There is some, but compared to other sectors it’s much less. And then when you add the BAB nuance to it ... for the BAB investors who have been so far accustomed to high levels of liquidity, it created discomfort.”
In the end, PNC said the Sabis transaction was good for the tax-exempt market, as it illustrated a demand for triple-B charter-school debt.
“For the charter-school movement, this has been the first deal of substance and size in 2009 to really open that market again,” said Greg McKenna, who heads PNC’s charter school tax-exempt revenue bond program. “And there have been deals done, but not as heavy of size and significance. This has really started to open up the market.”