DALLAS -- Standard & Poor's Corp. has assinged an A rating to the first issue under a new state-backed credit enhancement program that is expected to curtail the use of nonrated debt to Colorado schools.
The agency issued the rating for a $1.6 million North Conejos School District issue slated to be priced next week. The program is expected to save the district as much as 100 basis points in interest costs.
In Colorado, where 53.7% of the $417.6 million of school bonds sold last year were nonrated, the new approach could save millions of dollars for scores of districts tainted by special districts' municipal junk bond defaults, officials said.
"This will give market access to a large number of districts that don't have it," said Todd Whitestone, managing director at Standard & Poor's.
The Colorado legislature this spring adopted the program when it approve H.B. 1294, which allows the state treasurer to administer the program. The passag came six years after school officials proposed a guarantee program similar to those in use in 12 other states.
Under the Colorado plan, the payment of debt service is guaranteed because the law now allows the state treasurer to make debt payments if a district cannot. If a payment is made by the treasury, those funds are repaid from future state aid payments due the district.
"In a way, the state is going to garnishee the school district's wages," said Dee Wisor, a bond lawyer at Sherman & Howard in Denver who drafted the law. "But there is no real risk to the state."
Of course, officials do not believe the mechanism will ever have to be used. "There's never been anywhere near a default on a payment for a Colorado school," said Phil Fox, lobbyist for the Colorado Association of School Boards.
Because the new law allows the treasurer to make debt service payments out of future state aid, Standard & Poor's said it "will require the school district to show minimum historical coverage of 1.0 times on maximum proposed debt service to qualify for the minimum single-a rating."
Mr. Wisor, who is also a school board member, said that because all of the state's 176 districts receive state aid, they are eligible to participate in the cost-free program.
In a statement, Standard & Poor's noted that eligible financings include general obligation bonds issued by school districts on or after July 1, as well as voter-approved, nonterminable leases and installment contracts.
When Colorado officials first began discussing a public credit enhancement program in 1985, they envisioned a plan modeled on the permanent school fund in Texas, one backed by a multibillion-dollar land trust. However, constitutional problems ruled that out.
No one is certain how many districts will issue future debt under the credit enhancement program, but investment bankers say it provides good opportunity for poor and small districts.
"There are just some schools that because of demographics are not rated," said Steve Bell, a director for Prudential Securities Inc., which will price the North Conejos bonds next week. "They are all good credits."
Colorado investment bankers have complained that publicity over defaults on nonrated bonds issued by special districts have hurt the ability of other nonrated issuers -- including schools -- to gain access to the credit markets.
Despite the problems, nonrated bonds accounted for 29.8%, or $778.4 million, of the $2.6 billion of Colorado bonds rated by Standard & Poor's last year, according to Securities Data Co./Bond Buyer.
Among schools, the statistics are even higher, with 26 nonrated deals totaling $224.3 million last year. That represents 53.7% of all schools bonds and is twice the $107 million of triple-A bonds.
Mr. Bell said that even schools affected by defaults is overlapping jurisdictions should be helped by the new program.
He added, "This will enhance those districts that have taken a beating."