Michigan Finance Authority returns with school loan revolving fund deal
The Michigan Finance Authority is returning to the market with its first school loan revolving fund revenue bond deal in four years.
The authority will sell $300 million of taxable, term rate, school loan revenue bonds on Wednesday. The bonds will be issued initially in the term rate mode and will bear a fixed rate of interest at the term rates for initial term rate periods. The mandatory repurchase date for the term bonds is Sept.1, 2022 for the 2019 A-1 bonds and Sept. 1, 2024 for the 2019A-2 bonds.
S&P Global Ratings affirmed its AA-plus ratings on the bonds and Moody’s Investors Service affirmed its Aa2 rating on the bonds. Rating outlooks are stable. The revenue debt is not secured by, nor considered a debt of, the state of Michigan.
Citi is the lead manager. Siebert Cisneros Shank & Co. LLC and Stifel Financial Corp. are co-managers. Dykema Gossett PLLC is bond counsel.
The MFA was last in the market with school loan revenue bonds in 2015. Moody’s noted in a credit report that loan retirement financed through with GO bonds issued by individual school districts has begun to slow and outgoing loan outflow activity is projected to materially increase. If a school district can't pay principal and interest on its qualified bonds when due, the state is required to make a loan to the district in order that the district can make its qualified debt payments.
"The amount of outstanding loan receivables has fluctuated significantly at times over the past few years reflecting of the high degree of loan retirements financed with GO bonds issued by individual school districts," Moody's said. The rating agency warned that projected loan demands through 2023 will likely require additional loan balances to be pledged to the pool, which over time could change the weighted credit quality of the pool.
Deborah Roberts, executive director of the Michigan Finance Authority, said that the 2019 bonds issuance will decrease the taxable variable rate portfolio’s debt profile to 51% from 68%.
“We still have a lot of variable rate outstanding,” Roberts said. “Since we have so many variables — we don’t know what new school might come in future and we can estimate how school districts are going to pay back debt but we don’t know if that is going to be what actually happens. We have to allow some flexibility on collections of the loans and if they do the repayment at faster rate than we are predicting that we have the ability to call some of our debt.”
Michigan is constitutionally required to make loans eligible to school districts that participate in its credit enhancement program to ensure full and timely payment of debt service on local general obligation debt. The bonds are secured by repayments on loans made to the qualifying school districts. The MFA will have roughly $1.2 billion outstanding in school loan bonds after the deal, according to Moody's, and a roughly $940 million loan balance. Of this amount $310 million is pledged towards repayment of outstanding school loan revolving fund revenue bonds.
The program makes loans to school districts in circumstances where property taxes levied for debt service on qualified bonds are not sufficient to make full principal and interest payments.
Moody’s noted in its credit report that the weighted average credit quality of loan borrowers participating in the program estimated in the low Baa range.