BRADENTON, Fla. — Two Florida school districts today are closing on the state’s first issuer-subsidy qualified school construction bond deals, which are also the first in the nation to sell as certificates of participation.
Even though COPs pay a slight premium because the lease-based structures are different from a traditional general obligation bond deal, the two districts captured interest rates of less than 1%.
The Osceola County School District on April 20 sold $40.5 million of non-callable, taxable QSCBs at an effective interest rate of 0.858% with the federal subsidy factored in.
On April 21, the Citrus County School District sold $35 million of taxable QSCBs, sold as COPs, with a 10-year call provision at an interest rate 0.958%.
Both the districts expect the interest rate to be lowered further when sinking-fund earnings are factored in.
Only three of Florida’s 67 school districts made it to the municipal bond market last year to sell QSCBs with tax credits as originally authorized by the American Recovery and Reinvestment Act of 2009, according to Thomson Reuters. QSCB issuance was hindered because of the limited investor market for tax-credit bonds.
The jobs bill signed into law by President Obama on March 18 allowed QSCB issuers to receive direct subsidy payments from the federal government — similar to the popular Build America Bond program — instead of offering investors a tax credit.
The subsidy payments are determined by the lesser of the actual interest rate of the bonds or the daily credit rate for municipal tax-credit bonds set by the Treasury Department, which can result in roughly 100% of interest costs being subsidized.
Market experts and education officials now believe the new issuer-subsidy provisions and some relaxed deadlines for rolling over 2009 allocations will enable school districts in Florida to use up federal QSCB allotments despite the recession. The downturn has fostered steep declines in property tax values across the state, translating into a lower base for school districts and local governments to tax for their budgets.
The Osceola School District deal that priced last week was structured as a bullet maturity in 2027. It received an all-in yield of 6.658% while the subsidy of 5.8% resulted in a true interest cost of 0.90 basis points, according to Michael Olliff, a vice president at Wells Fargo Securities, the book-runner for the transaction.
“We had seven investors come in to purchase the bonds,” Olliff said. “That was what we anticipated. We were very pleased with the outcome of the sale and so is the client.”
While the COPs did not sell with the 10-year optional call provision that is becoming more acceptable for taxable munis such as BABs and QSCBs, Olliff said there are extraordinary call provisions. Prepayment is required if COP proceeds are not spent within three years, if the issuer subsidy is reduced or eliminated, or if the certificates lose their status as qualified school construction bonds.
Olliff said he believes the recent change in federal law allowing issuers to receive the subsidy will spark more issuance.
“The security is easily marketed because you can treat it as regular taxable debt now similar to regular BABs,” he said.
Osceola received its allocation under the state’s volume cap. The $40.5 million in proceeds will go toward the $82 million cost of building a new high school and the renovation of two elementary schools, said district finance director Sarah Graber.
“Essentially, we’re saving $21.7 million [over the life of the bonds] over doing a standard tax-exempt COPs issue,” she said. “It’s a really good deal for the school district.”
The Citrus County School District, which also received an allocation from the volume cap, used a bifurcated structure, selling $11.9 million of tax exempt COPs that amortize in the early years between 2011 and 2015, and $35 million of QSCBs that mature in 2027. Proceeds will go toward extensive renovations at a high school and to build an elementary school.
The district had been planning the sale for a long time, but delayed it a little longer to wait for the jobs bill and take advantage of the subsidy option, said Brent Wilder, a senior managing consultant at Public Financial Management Inc., the district’s financial adviser.
The QSCBs sold with an interest rate of 6.73% while the subsidy the day of the sale was calculated at 5.78%.
“When you factor in the sinking-fund yield, their cost of borrowing with qualified school construction bonds is [expected to be] less than zero,” said Wilder, adding that the exact rate isn’t known because the school has not locked in investments for the sinking fund yet.
Although the 10-year call provision added as much as 25 basis points to the cost of the borrowing because taxable buyers prefer make-whole calls, Wilder said proper call protection for the issuer is important.
For any taxable direct-subsidy bonds, including BABs, Wilder said, “In general, I do not recommend that issuers reduce the amount of revenues they pledge for the payment of debt service by the amount of the subsidy.”
“My advice to clients is they have to demonstrate they can pay the full taxable coupon,” he said. “They still owe the bondholders that money.”
Reducing the pledge by the amount of the subsidy could affect ratings and might elicit a higher premium from investors if the subsidy ends or is offset, or lowered, because of other payments owed to the federal government.
Still, there is general agreement that the new QSCB structure offering the direct-pay subsidy could open the door to more issuance from Florida.
In 2009, ARRA provided direct QSCB allocations totaling $372.65 million to 11 of the state’s largest school districts, and another $106.8 million to Florida’s volume cap for the state to dole out among school district that did not get a direct allocation. For 2010, 13 districts got direct allocations of $402.35 million while $81.03 million was added to the state volume cap.
While the exact issuance under the allocations in 2009 isn’t known since some were private placements, several school districts did return their allocations to the state pending the change in federal law this spring.
The Florida Department of Education is responsible for doling out allocations under the volume cap, but it does not monitor issuance of QSCBs by those district that received direct allocations, said Spessard Boatright, the director of educational facilities for the DOE.
“I know the first round was a little more difficult for buyers to buy and for [districts] to sell because of the tax credit,” he said.
With the subsidy option now available, “I think there are going to be plenty of people wanting to use the allocations and there will be a lot more requests for money than there is money,” Boatright said.