London ISD (TX)
Unlimited Tax School Building & Refunding Bonds Series 2018
May 29, 2018
On May 29, 2018, Siebert Cisneros Shank served as the book-running senior manager on this transaction for the London Independent School District. The firm’s ability to adapt to a rapidly developing financial picture and evolving bond structure, coupled with the ability to introduce a new name to a network of investors were instrumental in ensuring a successful transaction. London ISD lies on the southern edge of Corpus Christi, in Nueces County, Texas. Primarily a rural area, the District currently has 1,052 students enrolled across a single elementary, middle school, and high school. Enrollment has increased steadily between 8 – 15% over several years and the Bonds, authorized by an $18,000,000 bond election in November 2017, will allow the District to begin construction on a second elementary school, gymnasium and band hall.
The bonds were the District’s first issuance in three years and the largest in their history. The bonds are guaranteed by the Permanent School Fund and received an underlying rating of A+ by S&P. Originally scheduled to price the week of May 21st, the District was informed of an updated valuation of a wind farm to be assessed within the District’s boundary. The wind farm is expected to add $285 million to the District’s currently assessed value of $390 million. Although a 70% increase in valuation is a welcome statistic, wind farms may depreciate quite rapidly, in some cases between 10 – 14% annually. This presented an issue with the originally proposed level debt service structure of the Series 2018 bonds and alternatives were discussed to dampen the effect on existing and incoming residents (the primary source of tax value). Three distinct structuring scenarios were presented to the Board of Trustees that took these factors into account. A wrap-around debt service option was chosen with early principal payments that would take advantage of high but fleeting assessed values and late payments as existing debt service rolls off.
With the potential of declining assessed values and a desire to maintain flexibility in this post tax-reform environment, the District decided to issue the bonds with a 7-year call for serial issues maturing in 2026 – 2028 and term bonds maturing in 2030 and 2032, a 5-year call for term bonds maturing in 2035 and 2038, and a 3-year call for term bonds maturing in 2042 and 2046. This atypical structure gives the District optimum flexibility, allowing for the early retirement of bonds that have the highest debt service. With a pricing date moved from May 23rd to post-Holiday May 27th, the SCS sales desk was tasked with educating investors on the merits of a structure that included ever-widening call windows in a relatively short amount of time.
Leading up to a long Memorial Day weekend, geopolitical headlines dominated the investing landscape. Several issues, took center stage day in and day out: political concerns in both Italy and Spain, a plummeting Turkish Lira, the pending breakdown of a U.S./N. Korea summit, and further posturing in a fledgling U.S./China trade war. A flight to quality ensued with high-grade sovereign investments, the primary beneficiary, including the German Bund and US Treasury. The holiday-shortened week also rendered a light municipal calendar, with $3.4 billion set to price versus $6.5 billion the week prior. This was the backdrop as the order period began mid-morning Tuesday.
Coupled with a successful effort to reach out to potentially new investors, all but the term bonds in 2046 were oversubscribed, many between 5 and 8 times on a priority basis by the end of the initial order period (before repricing). The 5-year calls were among the most sought after, with the 2035 and 2038 term bonds oversubscribed 6.5x and 6.7x, respectively. With a strong book of orders, SCS recommended the District lower pricing spreads between 2 and 8 basis points in all but the 2042 and 2046 term bonds. For those, the 2042 were left as is and the 2046 saw an increase (widening) of 5 basis points. After the re-pricing, and despite some investors balking at the change in yields, the 2046 maturity ended up oversubscribed as well and there were no shortfalls in any maturity.
SCS’s sales desk generated $41.320 million of priority orders, or 78% of the total priority orders submitted by the underwriting group. Among the 21 firms submitting orders, there were potentially 16 new investors.