The California Bay Area school district, which recently made headlines for failing to pass a budget on time, sold $352 million in general obligation bonds last week.
The district entered the market with a lower underlying rating but shored up the deal with a bond insurance wrap covering most maturities.
The West Contra County School District was at risk of having its finances taken over by the Contra Costa County Office of Education after failing to pass a budget by the end of the fiscal year on July 1.
Board members were hesitant to approve the local control funding formula, creating a domino effect of not being able to approve the budget. The district ultimately retained financial control after the school board approved the 2024-25 budget in a 4-1 vote on Aug. 28.
Shelby San Vicente, vice president of Build America Mutual, said California School GO bondholders are protected from fluctuations in operating budgets.
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In a recorded message to the community in early September, Superintendent Kenneth “Chris” Hurst said, “In the process of revising the previously rejected LCAP plan, we are making significant changes not only to our county, but to the entire state. “We have entered unprecedented territory,” he said.
Hurst announced on Sept. 30 his decision to retire in December after more than three years as superintendent, citing family issues.
This month’s agreement was preceded by S&P Global Ratings downgrading the company from AA-minus to A-plus in September, with a negative outlook.
“The downgrade reflects our view of increasing structural deficits in the region’s operations,” S&P Global Ratings analyst Li Yang said in a statement. “This deficit is driven by declining enrollment trends and high truancy rates, which have resulted in a significant decline in average daily attendance in recent years.”
However, most maturities had a Build America Mutual Wrap and an associated AA rating from S&P.
“Voter-approved California School District General Obligation Bonds are secured by specific tax revenues that cannot be used for any purpose other than repaying this debt, and are paid directly by the county tax collector to the bond trustee.” Vicente said. Vice President of BAM’s Western Regional Finance Group talked about why BAM felt comfortable guaranteeing the school district’s debt. “The state also has a thorough and well-established process for identifying financial stress in school districts and working with counties to intervene.”
In fact, the district’s default and attempted bankruptcy in 1991, when it was known as the Richmond Unified School District, led California to create an intervention program for financially distressed schools.
“These factors protect bondholders from fluctuations associated with operating budgets and place greater emphasis on the underlying economic and demographic analysis that ultimately determines a district’s ability to repay its bonds,” Vicente said. ” he said. “The West Contra Costa School District has a large and growing tax base and population, and benefits from a strong Bay Area economy, all of which support long-term credit stability.”
JP Morgan priced GO at $352.3 million on October 16th. Nixon Peabody served as debt and disclosure advisor and KNN Public Finance served as financial advisor.
Blake Boehm, principal and managing director of KNN Public Finance, said the district benefited from market stability on the day of the sale.
“This week the market has seen an increase in MMD rates, but last week MMD rose and the market trend in debt prices became more stable,” Boehm said.
The school district’s bonds were oversubscribed at nearly all maturities. He said the new money portion of the deal received orders for more than $1.83 billion against $250 million in available bonds. It was also the only major deal in California scheduled for last week.
West Contra Costa USD has not fully implemented its financial solvency plan, which was cited in S&P’s rating report when it downgraded its rating. The plan includes spending cuts in positions and other items. Although the district has not implemented the entire plan, it has had some success in implementing some parts.
The bond is backed by Measure R, a bond measure approved by voters on March 3, 2020, that allows the district to issue up to $575 million in GOs, according to a preliminary offering statement. It will be done. The measure was approved by 58.73% of voters.
After the bond sale, the board was expected to have about $250 million in surplus capacity, according to bond documents.
Proceeds from the 2024 Series B and C New Money GO Bonds will fund capital improvements to District facilities. Series A and Series B GO Refinancing Bonds are used by school districts to purchase some or all of the underlying bonds that their holders have subscribed to purchase to reduce costs.
West Contra Costa Unified School District voters approved $575 million in general obligation bonds in 2020.
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Almost the entire transaction was insured.
“Ultimately, it was economically advantageous to keep most maturities insured to improve pricing for the district,” Boehm said.
“Issuers and underwriters are constantly assessing investor demand for insurance and where it can best benefit them,” said Grant Dewey, head of capital markets at BAM. “Although the majority of BAM trades are fully insured, it is not uncommon for particularly large trades to have partial insurance that excludes shorter maturities, as insured spreads are usually the narrowest. ”
According to BAM, the only bonds sold without insurance were Series B bonds due in 2025 and 2026. Overall, BAM insured $286 million of the $340 million issuance.
