CHICAGO -- The Indiana Bond Bank last week sold an innovative bond issue that greatly expands the lending power of the state's common school fund.
Kemper Securities Inc. priced $118 million of Indiana Bond Bank Common School Fund Advancement Purchase Funding bonds insured by AMBAC Indemnity Corp. A.G. Edwards & Sons Inc. was co-senior manager on the offering, which was made last Thursday and is scheduled to close a week from today.
Lloyd Shenfield, a first vice president of public finance of Kemper, said he was not aware of any previous deal in Indiana in which a state agency obtained assets for new loans by selling old loans to a conduit issuer.
The bond bank will use most of the $113 million in proceeds to buy more than 150 individual loans that the common school fund made to elementary and secondary schools. The loans carry various interest rates and maturities fixed at the time the loans were made.
The fund will use the money to make loans to school districts, he said.
Debt service on the bonds will come from the tuition support the state pays school districts, the same revenues the districts use to pay off their loans to the fund.
Shenfield said the tuition support, which is basically the schools' state revenue sharing, accounts for about 60% of the schools' operating revenues and gives the bonds 60 to 70 times debt service coverage. He said the money to pay off the loans will be intercepted from the schools' monthly state tuition support, and then will be held in escrow and paid to the bond trustee every six months to cover debt service.
"The deal was basically a securitization of the cash flow of the loans," he said.
The financing, which was developed by Kemper, had been in the works for at least two years, according to participants. Legislation was passed last year allowing the state to sell the loans to the bond bank.
Ted Esping, a partner at Baker & Daniels, the bond counsel for the transaction, said the deal will allow the state to "make a lot of loans to schools" at a time schools need the money and when interest rates are low.
Shenfield said that without the financing through the bond bank, the common school fund would have been able to loan only $8 million a year to schools over the next seven years beginning in 1994, based on the amount of loans it sold to the bond bank. That is because the fund can loan only money that it takes in, most of which usually comes from loan repayments.
With the deal, the fund will have more than $100 million available to loan to schools for their building and technology-related projects, such as the acquisition of computer equipment.
Mark Moore, the state's special liaison for public finance, said Gov. Evan Bayh supported the financing because it will make lower-cost loans available to schools.
While the schools will continue to pay off their existing debt to the fund at their current interest rates, which range from 3.375% to 9%, new loans from the fund of up to $15 million will carry significantly lower interest rates.
Under legislation passed this year, technology loans can carry interest rates ranging from 1% to 4%, while building loan interest rates will range from 4% to 7.5%. Moore said the Indiana Board of Finance will recommend that new school loans through the fund for technology purposes carry an interest rate of 1%.
The technology loans are available to all 296 school corporations in the state, while the building loans are for schools in the lowest 40% in terms of assessed valuation of property or that need to replace facilities due to disasters, he said.
Shenfield said the deal was insured because the financing was unique and because backing will aid in marketing the issue. The triple-A ratings from Standard & Poor's Corp. and Moody's Investors Service will bring a low interest rate, he said.
The bonds, which carry maturities from 1994 to 2011, were priced with a net interest cost of 5.079% and a true interest cost of 5.008%.
Davis Palmer, first vice president and manager of the general obligation and tax-backed group at AMBAC, said the only risk to a credit enhancer in the deal was if the state ceased its support of schools. "That's not going to happen," he said.
"We looked at the structure of this deal and saw the substantial coverage from the ability to divert state aid to make the loan payment and found it was a very secure deal that we were pleased to offer insurance on," he said.
Shenfield said that 60% of the bonds were sold to intermediate funds and insurance companies, 20% to trust funds, and 20% to retail investors.
Shenfield said the deal could have applications in other states that make loans to schools or municipalities.
"Now that we have one under our belt, we are looking at other states," he said.
Both Moore and Lisa Cottingham, executive director of the bond bank, said they would consider doing another deal of this kind in Indiana.