PCBOE hears from investment bankers
by DAVID ATCHISON
Feb 13, 2013 | 1476 views |  0 comments | 5 5 recommendations | email to a friend | print
PELL CITY – An investment banker advised Board of Education members it could be more costly for the school system to secure its own bond issue instead of joining the city in the loan process.

The Board of Education members are exploring the possibility of securing their own bond issue for a proposed $8 million project to upgrade the Spring Sports Complex, high school football stadium, the construction of a new outdoor track, and the possible refinancing of the board’s part of a 2006 bond issued through the city.

A 2011 legislative act allows school boards to secure bonds for capital projects like other county and city entities or governments using multiple funding sources.

School board members met with four investment banking firms during a special called work session Tuesday.

Investment bankers told members of the board that if the school system is seeking to secure its own bond issue, it must first secure a credit rating from a credit agency.

Officials said the higher the credit rating, the lower the interest rates the school board could secure on bond issues.

For more than a decade the school system has secured funds through city bond issues. The city currently enjoys an AA- rating.

Larry Ward, who has acted as a financial advisor for the city and who is an investment banker with Raymond James|Morgan Keegan, said it is a gamble for the Board of Education to secure its own rating, because it could actually be lower than the city.

“It’s like rolling the dice,” Ward told board members.

Matt Adams, another investment banker for Raymond James|Morgan Keegan, said the rating would remain with the board for the life of the debt, but the rating is reviewed every 1-2 years.

Adams said if the school board received a lower or even the same rating as the city, it could still see a loss in interest rate savings.

He said the BOE could only save on interest rates if school system received an AA rating, one step above the city. He pointed out there are only three school systems in the state that have secured an AA rating or better in the past three years.

Adams said the Hoover and Homewood Boards of Education have an AA rating, and the Mountain Brook school system secured an AA+ rate.

Adams said if the school system received an A+ rating, one step below the city, it is estimated to cost the board an additional interest expense of $279,000.

He said if the board chose to seek its own financing, it would incur additional expenses that were normally split between the board and the city. Other expenses, like the annual trustee fee, were assumed by the city.

Adams said expenses shared or incurred by the city include the cost of legal counsel, which ranged from $25,000-$50,000; rating fee for an $8-$20 million bond issue would cost $14,000-$20,000; annual trustee fee totals for a 25-year issue is approximately $50,000; and smaller miscellaneous costs.

If the board decided to secure its own bond issue, it would incur all expenses.

“Between those three major costs, you’re incurring an additional $100,000 in expenses, if not more,” Adams said.

Pell City Manager Patrick Draper said the city continues to explore funding options for possible city projects, but nothing is set in stone at this time.

Draper said the city will continue using Raymond James|Morgan Keegan as its investment banking firm for assistance in funding future capital projects for the city.

He also said it is less costly, not only for the Board of Education, but also for the city, by jointly securing one large bond issue for both entities.

“It will save both of us money, mostly in legal fees,” Draper said.

Raymond James|Morgan Keegan was one of four investment banking firms that addressed the board Tuesday night.

Other investment firms included Merchant Capital of Montgomery, The Frazer Lanier Company of Montgomery and Benchmark Securities of Birmingham.

Raymond James|Morgan Keegan was the only investment firm that did not provide a set underwriter’s fee or cost to the board.

Adams said Raymond James|Morgan Keegan will provide the board a fee cost as soon as possible, but he said the fee rate is secondary to the interest rate secured by the finance company.

“You might be able to save $10,000 up front on the fee, but it could cost you a half-percent in interest, which could translate into hundreds of thousands of dollars on the life of the issue,” he said. “Our fees are going to be very competitive.”

Adams said the city is currently considering about six different debt structures, and if the Board of Education funding proposals are added, there are about eight different funding scenarios.

He said that is why Raymond James|Morgan Keegan cannot provide an exact underwriter’s fee at this time.

“To give a (fee) quote now, is like asking a contractor how much it is going to cost you to build your home, but you don’t know who many bedrooms you want,” he said.

Ward said “generally” the larger the bond issue, the lower the interest rate.

“Larger principal amounts generally attract more investors on a bond issue,” Adams explained. “As a result, more demand is generated for the bond, causing a lower interest rate. So when the city and School Board seek a bond issue jointly, it helps drive rates down.”

After Tuesday night’s work session, the board briefly convened a special called meeting, where the board voted to table the decision to approve an investment banking service provider to execute the sale of warrants to fund a capital project.

The board is expected to hold its regularly scheduled board meeting Tuesday at 6 p.m.

Contact David Atchison at datchison@dailyhome.com.