School board votes to refund bonds in favor of lower interest rate
By DANIEL NASH
Bonney Lake-Sumner Courier-Herald Reporter
September 19, 2011 · 4:09 PM
Jon Gores of D.A. Davidson introduced himself to the Sumner School Board as a man "in the business of selling silver linings."
The environment of economic turbulence at home and abroad, he said, was one likely to result in currency inflation. As unfortunate as inflation is, it would provide a perfect opportunity for the school district to refinance its debt, he said.
In this case, the debt is a 2003 issuance of unlimited tax general obligation bonds with an outstanding payable value of $9,000,000, and a final maturity date of June 1, 2022. Facing an interest rate in excess of 4 percent, the school board voted unanimously to refund the bonds in favor of a new bond issuance at an interest rate of more than 2 percent.
The vote will kick off the process of re-rating the district, calling old bonds, and issuing new bonds.
Gores told the board that a lowered rating would be unlikely in the absence of major changes in the district's financial health, though it was necessary to go through the rating process every time a new bond is issued.
Under the bond financing system, an organization obtains funding for budget shortfalls or specific building projects by selling debt securities to investors. Investors buy the securities on the promise that they will be paid back their loan plus interest at an agreed date of maturity. With bond in hand, investors can hold it to maturity or sell to another investor at a price based on confidence in the issuer's financial health.
If the investor has confidence in the issuer, a bond held to maturity is a remarkably stable investment. It's that stability which causes inflation to become a bond's natural predator; a less-valuable dollar makes the investment less valuable. Which is why refunding Sumner School District's bonds is an attractive option all-around, Gores said.
"Investors want a higher coupon rate (the promised future value) on their bonds," Gores said. Though the interest rate on the securities will be lower, the coupon rate at maturity in 2022 will be set to the current value of the dollar.
A refunding does not create new money for the district, but simply provides a means to retire outstanding debt. The old bonds are defeased -- voided when the borrower sets aside cash or bonds sufficient to service the debt -- and therefore the new bonds are the only bonds that can affect the district's debt capacity.
No party is allowed to benefit from a bond reissuance, except taxpayers. However, the benefit to taxpayers will be small: a few cents less per $1,000 valuation on property.
Investors contractually agreed to the possibility of a refund at a certain date -- in this case, June 1, 2013 -- upon purchase of the district bonds. They will be recompensated the par value of their securities, at which point they are free to reinvest in the new bonds or take their money elsewhere, Gores said.
Because the refunding will take place more than 90 days before the 2013 call date, it is what is known as an "advanced refunding." Funds required to complete the call on the old bonds will be placed in escrow until the call date.
The rating and reissue process is expected to proceed in October.Contact Bonney Lake-Sumner Courier-Herald Reporter Daniel Nash at firstname.lastname@example.org or 360-825-2555 ext. 5060.