CHICAGO — Ohio has launched a new bond program aimed at lowering borrowing costs for two-year colleges across the state.
Stark State College of Technology on Tuesday sold $20.1 million of tax-exempt and taxable Build America Bonds through the Ohio Building Authority, marking the first borrowing under the program.
“We’ve been working on this for several years,” said Kevin Fenlon, assistant director of the OBA, which will be the conduit issuer. “In discussion with members of the community, it was brought to our attention that there is an underserved market in the state, and that we were an appropriate vehicle to undertake such a program.”
By borrowing through the OBA, a well-known and double-A rated credit, many lower-rated or unrated two-year colleges can expect to see lower borrowing costs.
Moody’s Investors Service assigned a Aa2 rating to the Stark debt, a notch below the state’s rating. The outlook is negative, reflecting the negative outlook on Ohio’s general obligation rating. Moody’s is the only agency to rate the bonds. The program’s key credit strength is the state’s pledge to send aid directly to the bond trustee if the borrower is not able to make a payment.
“Our expectation is that there will be a fairly good flow of deals,” said Brad Sprague, president of Columbus-based Prism Municipal Advisors LLC, the OBA’s financial adviser for the program.
“Community colleges in Ohio are the fastest growing segment of the higher-education market, and the capital needs of those institutions are probably at a higher level than had been historically because enrollment is growing so fast.”
The OBA tapped PNC Capital Markets to act as sole manager on the program’s first several transactions, according to Fenlon. Peck, Shaffer & Williams LLP is bond counsel.
The Stark State sale of tax-exempts and BABs captured a blended interest cost of 3.39%, Sprague said.
The tax-exempt series, which feature a 2019 maturity, secured a yield of 2.16%. The BABs, which mature in 2020, 2025, and 2030, saw a yield of 3.69%.
“We were very pleased with how it was received in the market,” Sprague said.
He added that the yields on the debt were seven to 12 basis points higher than on a piece of traditional lease-backed bonds the OBA priced the same day.
“For a brand-new program and a brand-new credit, we were very pleased with that spread to the more well-established OBA programs, and our goal is to see that spread diminish or be eliminated over time.”
The Legislature enacted the Ohio Community and Technical College Credit Enhancement Program as part of its 2009 budget.
Schools interested in the program need to win approval from the State Board of Regents, the OBA, and the Office of Budget and Management.
The debt will be payable from the institutions’ general receipts and the state has implemented several criteria the school must meet to participate. For example, the borrower’s state aid must equal at least 1.25 times the fiscal year’s remaining debt service, according to Moody’s.
“We believe this program will function with strong state oversight, from the Board of Regents as well as the state’s Office of Budget and Management,” Moody’s analyst Karen Kedem wrote in a report on last week’s financing.
Many Ohio two-year colleges depend heavily on state aid, which sometimes makes up 50% of their budgets.
The state currently distributes aid to schools in monthly payments. The Board of Regents has pledged to send the monthly payment directly to the bond trustee if the school is going to miss a payment.