Bond Refund Highlights Board of Education Meeting

The impact of the credit downgrade issued to Collingswood by Moody's Investors Service still reverberates throughout the borough, as the Board of Education was advised Monday that it would be better suited to seek its own investment rating rather than to tie its fortunes to those of the borough in refinancing some $14.5 million in public school bonds.

At its regular monthly meeting Oct. 21, the Collingswood Board of Education heard a proposal from public finance attorney Ronald Ianoale of McManimon, Scotland & Baumann, LLC (MSB) advising the district to refinance its bonds while interest rates are at “historic lows.”

According to the proposal, the district could save some 3.5 percent, an estimated $635,000, without significantly altering the terms of the repayment. The bonds will still carry a redemption date of June 2015 with a maturation period from 2013 to 2030.

“There’s no downside,” Ianoale said. “Because it’s a refunding, the law allows you to have an underwriter up front… you have access to credit markets to have the maximum savings that you can have, and then negotiate those interest rates at a time that’s most advantageous to you.

“No one gets paid unless the transaction closes,” he said.

Sherry Tracey, Managing Director of Phoenix Advisors, LLC, a Bordentown-based financial consultancy, said that the process, once enacted, would take six to eight weeks to close.

“It is a process, which is why we’re recommending starting it tonight,” she said.

Board member Lisa Soulos asked whether the refinancing process would enable the district to repay its loan any earlier; Tracey said no.

“There’s not quite enough savings there because some of the principal payments are rather large,” she said. “Restructure out to 2030, and that way your debt service reduces in every single year. You end up keeping the same type of debt service structure you have now.”

At a minimum, Tracey said, the district could save about $580,000 at a 3 percent rate.

The big hang-up in pinning down specific numbers, Tracey told the board members, is that the school district “has not had a true underlying credit rating” in its history.

“The last time you issued bonds, everybody bought insurance for their bonds, which makes them AAA, the highest rating,” she said. “Every school district really looked the same because everybody was wrapped with this AAA credit."

But in the 2008 financial meltdown, Tracey said, "a lot of the insurance companies were involved in rating some of those types of structures, and as such, were severely downgraded.

“There’s no AAA ratings agencies anymore," she said.

Board member Louis Evangelista pointed out that the school district should be in a attractive position for investors after having received a very positive review of its finances in its most recent fiscal audit.

“What else do the bond agencies look at?" he asked.

Tracey said that in establishing an underlying credit rating, agencies generally consider the last three years of the financial history of a district, its underlying tax base, and how those factors compare at those of other school districts throughout the state and country.

“Everything from the standpoint of median family income, unemployment, total assessed values over the last five, six, seven years,” she said. “Generally you don’t see municipalities and school districts too far off; a notch or two.”

But because Collingswood suffered a credit downgrade at the hands of Moody’s, Tracey recommended to the Board that it use “a different rating agency than the borough is using now,” suggesting Standard and Poor’s, which has never rated the district.

“If we didn’t get an underlying [credit rating] on our own, and then investors are saying ,‘Why didn’t they get that?’, the only other one that’s out there is Moody’s, and that would negatively impact the savings on the bonds,” Tracey said. “I don’t think we’d be able to reach that 3 percent level.”

Ionoale reminded the board and audience, however that school bonds are secured by the School Bond Reserve Act of NJ, which means that, in general, Standard and Poor’s will rate SBRA bonds AA-, “which is very high.”