The Massachusetts Development Finance Agency is working on a nearly $35 million bond sale that will include $29 million of taxable Build America Bonds on behalf of a triple-B rated charter school.
The transaction will enable Sabis International Charter School to acquire buildings and 38.7 acres of land valued at $29.1 million, which the school has been leasing. This is the first bond deal for the school.
PNC is the underwriter on the transaction. Edwards Angell Palmer & Dodge LLP is bond counsel. Daroth Capital Advisors LLC is Sabis' financial adviser.
Standard & Poor's rates Sabis BBB with a stable outlook. Fitch Ratings and Moody's Investors Service do not rate the credit.
A pricing date has not been set as PNC is still evaluating the market, according to Frank Canning, vice president at MassDevelopment.
The transaction consists of three series with term bonds. There are no serials offered in the deal, according to the preliminary official statement. Series 2009A includes $29 million of direct-pay BABs in two term bonds, Series 2009B totals $5.3 million of tax-exempt debt, and Series 2009C includes $465,000 of taxable bonds. The POS does not indicate years of maturity and all three series include mandatory redemption provisions.
The bonds will be issued in denominations of $100,000.
MassDevelopment and Daroth Capital referred all questions regarding the structure of the bond deal to PNC. The underwriter declined to talk about the transaction.
While local school districts have sold BABs, market participants said charter schools are more unique credits in the taxable school BAB market as they rely upon annual state appropriations or tuition fees and cannot tap into the local property tax base to finance operations, as public schools do. In Massachusetts, charter schools are agencies of the commonwealth and managed by a board of trustees.
Also, only one other similarly rated credit has accessed the BAB market to date. On May 20, Albany, Minn., sold $800,000 of BABs. Moody's rates the city Baa1.
In that deal, bonds maturing in 2014 with a 3.5% coupon priced with a 3.5% yield, debt maturing in 2019 with a 5.25% coupon yielded 5.25%, and bonds maturing in 2025 with a 6% coupon priced with a 6% yield. Those taxable yields were from 170 basis points above the Municipal Market Data triple-A scale in 2014, 247 basis points above in 2019 and 245 basis points above in 2025.
Both its rating and its credit structure make Sabis a new entity for institutional buyers to examine and could show whether the BAB market can absorb such transactions, according to market analysts.
"I think it will be an interesting test of the marketplace," said Chris Mier, managing director at Loop Capital Markets LLC. "It could very well do terrifically well, but we don't know. We're just going to have to wait and see, but I think it's going to give a hint as to how much liquidity is in the marketplace and what kind of reception more unique issues get in this new BABs market."
Richard Ciccarone, chief research officer and managing director at McDonnell Investment Management LLC, said insurance firms who are familiar with charter schools and are looking for long-term durations on taxable debt might be interested in investing in a charter school BAB deal.
"The people who would be most likely to look at these would be insurance companies that have muni in-house research, who've done charters in the past on the tax-exempt sides," Ciccarone said. "That would be the most likely candidates for this and would be willing to put it in their taxable portfolio."
Barnet Sherman, managing partner at Braintree Capital Partners LLC, also pointed to insurance firms as potential buyers in the Sabis issue. Braintree is reviewing the deal for its portfolio.
"We're speculating ourselves as to who's going to buy, and then what liquidity might there be in the secondary market, if any, for this," Sherman said. "And of course, finally, how is this going to be valued over time?"
Sabis, which opened its doors in 1995, is a K-12, college preparatory school located in Springfield. The institution has 1,574 students and is at capacity under its current charter. The charter will be up for renewal in fiscal 2011, a factor that Standard & Poor's points to in its rating of the credit.
"The rating reflects what we view as the inherent uncertainty associated with charter renewals, given that the final maturity of the bonds far exceeds the time horizon of the existing charter," according to a Standard & Poor's report.
While the school is expected to experience weak liquidity immediately following its acquisition of the facilities, Standard & Poor's expects Sabis' reserves to improve over time. In addition, the school has a stable financial history and regular budget surpluses. Demand is also strong, as Sabis has a waiting list of 3,024 students.
Sabis will collect $10,332 per pupil from Massachusetts in the 2009-2010 school year, pending passage of the state's fiscal 2010 budget. In the current school year, Sabis received $9,905 per student from the state.
End of the year net assets for the school totaled $1.28 million in 2008 and $760,284 in 2007, according to an independent auditor's report.
Owning the school buildings and land rather than leasing the property could help the school's finances over the long term.
"The end result of this financing would be that [Sabis] would ultimately own the facilities that they've been renting for quite some time, which would help them obviously build their balance sheet and have a very strong asset on their books," Canning said.
Meanwhile, the deal could open the door for other triple-B credits looking to find cost savings through BABs.
"The triple-B credits in Build America Bonds are certainly not prevalent, let's put it that way," Sherman said. "Maybe they'll become more prevalent, maybe this is the tip of the iceberg [where] others begin to look at this and look at the spread against triple-B muni against tax-exempts and say, maybe there's a chance here given our balance sheets."
