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Northside Independent School District, San Antonio, Texas
Case Study: Northside ISD issues $84 million in softput bonds
Client Since: 1984
Projects: School Construction
Background
Northside Independent School District is one of the fastest growing school districts in Texas. With headquarters in San Antonio, the school district encompasses 316 miles in western Bexar County and has a healthy and growing tax base. Northside ISD has 88 schools and an enrollment of more than 90,000 students. The school district has opened 20 schools in the last six years with 12 more planned to open over the next three years.
FirstSouthwest has served as financial advisor to Northside ISD since 1994. FirstSouthwest developed and implemented the school district’s plan of finance which included five bond elections authorizing the issuance of $1.94 billion in general obligation bonds. The plan of finance was modified in 2001 to include both variable rate and traditional fixed rate bonds to finance the school district’s construction program.
Since 2001, the school district has utilized both fixed rate and variable rate bond issues to meet its large capital needs for facilities construction. The variable rate bond issues have been sold under a multi-modal bond document that provides the school district with maximum flexibility to finance its capital needs in the short-term market.
The school district currently has five variable rate bond issues totaling $312 million in principal amount outstanding. The five variable rate bond issues represent approximately 21 percent of the total bonds outstanding. All but the last variable rate bond issue have liquidity facilities that cost the school district less than 10 basis points per year.
The Challenge
Prior to January 2009, all of the school district’s new money variable rate bond issues were sold in a term rate mode of one year or longer with liquidity facilities provided by various banking institutions. The one-year or longer term rate mode minimized the interest risk typically associated with shorter term variable rate bond issues during the fiscal year. When Northside ISD and FirstSouthwest met in early 2009 to develop the plan of finance for the fiscal year, FirstSouthwest advised the school district that liquidity facilities for the upcoming new money variable rate bond issue would be expensive and difficult to obtain. The school district asked FirstSouthwest to explore other options for issuing additional new money variable rate bonds.
The FirstSouthwest Solution
After exploring various options, FirstSouthwest, in April 2009, recommended the school district consider issuing $84 million in new money variable rate bonds with a two-year soft put structure. The soft put structure for this transaction was possible, despite the difficult market conditions, because of the excellent long-term credit ratings of the school district (Aa2/AA/AA). The school district was able to accommodate the soft put structure in its existing multi-modal bond document with minimal changes. The new money variable rate bonds were priced in May 2009 and closed at the end of May.
Results
Because of the school district’s strong ratings and the deep market for the school district’s bonds, the initial interest rate of 2.25 percent was oversubscribed 3.75 times, which subsequently allowed the underwriter to reduce the interest rate to 2.10 percent. The school district administration was pleased with the bond sale because of the attractive interest rate and because the school district retained access to the short-term market with the soft put structure. The school district estimated that the use of the soft put structure will save between $840,000 and $1.26 million in liquidity fees on an annual basis.