WASHINGTON — Although qualified zone academy bonds have garnered few headlines, market participants who have worked with the tax-credit bond program say it has been successful, and the billions of dollars in QZABs and qualified school construction bonds authorized by the $787 billion stimulus are garnering significant interest from issuers.
But the new taxable tax-credit bond programs still have to clear a number of hurdles as issuers and investors alike familiarize themselves with the tools, they added.
When the stimulus package was enacted in February, it boosted a QZAB program designed to help renovate disadvantaged schools. The program had received $400 million in annual authorizations since 1998, but an additional $1.4 billion was authorized for 2009 in the package.
It also created a brand new type of school tax-credit bond, qualified school construction bonds, or QSCBs, to finance new schools, and authorized $22 billion for the program for 2009 and 2010. Tax-credit bonds provide investors with a tax credit in lieu of tax-exempt interest.
The Treasury Department released guidance at the beginning of this month outlining the two programs. It also allocated to states the $400 million of QZABs authorized in 2008 and $1.4 billion for 2009, as well as the $11 billion of QSCBs authorized for 2009, with 2010 allocations to come in future guidance.
Edward McLiney, chairman of McLiney and Co. of Kansas City, Mo., an investment bank that has done over 300 QZAB deals since 1998, said that since the Treasury guidance was released, his office has fielded many calls from issuers interested in pursuing these bonds.
“A lot of municipalities, schools, are expressing a lot of interest in it,” he said, noting that much of his time now is being spent educating interested issuers, particularly on the brand-new QSCBs.
“We’re spending a lot of time educating the potential clients about what are those new tax-credit bonds, how is it beneficial to them,” McLiney said. “Every one of these districts are different ... and one size doesn’t fit all.”
Appu Kuttan, founder and chairman of CyberLearning, an arm of the National Education Foundation that helps schools use QZABs, said he has spent recent weeks fielding questions from state officials and discussing them with Treasury officials.
“We’re kind of coordinating it,” he said. “There’s a lot of questions and a lot of interest.”
States such as Florida and New York are already in the process of collecting applications from school districts to determine which projects to finance with the bonds, with the intention of sub-allocating the bonds by the summer construction season, Kuttan said.
Even though the QZAB program has not produced many large deals, McLiney says states typically have used up nearly all of their annual allocations.
“Most of the deals are too small and don’t get any type of recording,” he said.
The average size of the 357 QZAB offerings his firm has done since 1998 is just $1.3 million. Often schools would put together deals of just a few hundred thousand dollars, which were usually privately placed with local banks, according to McLiney.
“The key is ... $100,000 to a small school district is every bit as valuable as that $100 million value is to the large school district,” he said.
However, even though the QZAB sector has experienced healthy activity, McLiney says the program has faced challenges in recent years. Most significantly, changes to the arbitrage regulations for QZABs have hampered the program, McLiney said.
Originally, QZABs were not subject to the arbitrage rebate and yield restrictions that apply to tax-exempt debt, prompting concerns from federal officials that the bonds could be abused. QZABs were placed under arbitrage restrictions in 2006, eight years after they were created.
“Someone got worried that there might be some abuse, so they changed it and really made it ... much more difficult for the schools,” McLiney said. “We’re talking about a million dollar issue here or there … there’s not a whole lot of abuse to be had.”
As a result of the new restrictions, many national banks that once bought the bonds backed away from the more restrictive structure, according to McLiney.
Those restrictions were relaxed somewhat in 2008 when all tax-credit bond programs were placed under a universal framework as part of the federal bailout law. QZAB issuers can now establish a sinking fund earning limited interest to help repay the debt. The most recent QZAB allocations are the first since that modification.
For QSCBs, McLiney said many issuers will probably need to be patient as investors familiarize themselves with the bonds and a market develops.
“Is it going to be successful? You’d love to be able to say you bet it’s going to be successful … but it took years for QZABs to get up and running,” he noted. “These things aren’t going to come flying off the shelf .... They’re going to have to be very patient.”
Large school districts that received direct allocations from the Treasury are already putting together some deals. The San Diego Unified School District this week priced $38.8 million of QSCBs.
It remains to be seen if the dramatic increase in tax-credit bond authorizations will affect how the bonds are sold.
In previous years, Congress authorized slightly more than $1 billion in tax-credit bonds a year, between QZABs and clean renewable energy bonds. But the stimulus law authorized $27.4 billion of tax-credit bonds in 2009 and 2010.
The increased authorizations may lead to some larger tax-credit bond deals. Kuttan said some states are considering removing their limitations on how much a single school or district could receiving in bonding authority.