WASHINGTON -- Learning a lesson from the Richmond bankruptcy case, Coachella Valley, another financially troubled California school district, overcame investor fears by providing additional security to back up its $8 million certificates of participation offering last month.
The issue was readily snapped up by investors -- despite the district's acknowledgement in its official statement that it is "experiencing financial difficulty" -- because it was secured by tax increment revenues provided by two area redevelopment agencies. Tax increment revenues come from the increased taxes that result from rising property values.
The added security comes from a 1988 amendment to the federal bankruptcy code that grants preferential treatment to securities backed by pledged "special revenues," bankruptcy attorneys said. Specifically, the use of such revenues for bond payments is not automatically suspended when a municipality files for bankruptcy, and the revenues can continue to be devoted to bond payment throughout the bankruptcy, they said.
While the Coachella district has no plans to file a Chapter 9 petition, participants said, its offering statement goes into detail about what could happen if it did. While the district's attorneys believe the certificates would be given special treatment in a bankruptcy proceeding, the statement notes there is "no controlling precedent" on whether the 1988 bankruptcy code amendment would apply.
Dealers at PaineWebber Inc., the underwriter for the certificates, recommended using the tax increment structure to ensure investor interest in the offering, participants said. The deal was modeled on a Hemet, Calif., school district offering last year also underwritten by PaineWebber.
The Coachella issue was not rated and does not otherwise provide many guarantees for investors. As with many lease offerings, the certificates are not backed by the general credit or taxing powers of the district or other state jurisdictions, other than the tax increment collections.
In addition, while the certificates' proceeds are to be used to build and lease property and equipment such as portable classrooms and school buses, the certificates indenture contains a "non-eviction clause" that precludes investors from reentering and re-letting the property in case of default.
Unlike the Richmond certificates, which were issued in 1988 and are now subject to a bankruptcy proceeding, participants said the Coachella certificates had to take into account new state regulations that prohibit the eviction of personnel from property dedicated to school uses.
In another lesson learned from the Richmond case -- where most of the certificates proceeds were used to finance short-term operating expenses -- the Coachella certificates are to be used solely to finance long-term capital projects, participants said. Thsi restriction also reflects a California law, enacted in 1990, which prohibits school districts from using certificates to finance their annual budgets.