In July 2020, Uplift Education (Dallas and Ft. Worth) sold $28.7 million in bonds through the Arlington Higher Education Finance Corporation. The bonds carried an underlying rating from S&P Global of BBB-, and from Moody’s Investors Service of Baa2. Uplift added the Moody’s rating this year and received the Baa2 rating. So, with both agency’s rating qualifying Uplift for the Texas Bond Guarantee program under the PSF, the bonds carried both agencies’ enhanced rating and were rated AAA/Aaa.
Continuing the trend of well-timed issues, Uplift came to market after weeks and weeks of inflow into the municipal bond funds. The first few months of the pandemic saw the muni market experience severe disruption, but over the last few months, the muni market has stabilized and even improved. Spreads are now approaching the pre-pandemic levels of February 2020.
Uplift was able to structure their longer bonds using a discount structure, meaning sold at less than 100 cents on the dollar, versus the more-often used premium structure, where bonds are sold at more than 100 cents on the dollar. Under a premium structure, the yield to maturity contains a “kicker”, resulting in a higher yield than a par or discount structure, because the premium is amortized to the 10-year call date instead of to maturity. This protects investors from not recouping the cost of the premium if their bonds are called away in ten years. But it also has the effect of increasing the cost of the structure to maturity for the borrower since the higher coupon associated with premium bonds remains even though the premium has been fully amortized.
Investors like premium bonds because it gives them extra cash-flow from the higher coupon. Borrower’s like premium bonds because they can issue less debt to raise the same amount of proceeds and they may have more ability to refinance the higher coupons for savings in the future. But, given the overall level of interest rates, positioning Uplift for a possible (but not for sure) refunding in the future was less desirable, reducing the attractiveness of paying the “kicker” associated with the premium bonds.
For a 30-year issue, Uplift garnered a 2.37% True Interest Cost (TIC), in part due to the discount structure on the bonds and the 2% coupons such a structure were able to achieve. This compares favorably to the TIC of some other PSF-backed transactions sole earlier in July, as well as compared to an issue which sold the day after Uplift’s deal.
Uplift will use the proceeds to fund improvements to Uplift Elevate Preparatory and to Uplift Summit Feeder academy. At the time the bonds were priced, there remained uncertainty about how school would open in the Fall, online or in person (or some combination). Uplift was able to explain their detailed and common-sense approach to delivering education very successfully to both rating agencies as well as investors.
Buck Financial Advisors LLC served as Municipal Advisor on the transaction. Robert W. Baird served as underwriter, McCall, Parkhurst and Horton LLP served as bond counsel, Quarles & Brady LLP served as underwriter’s counsel, and Winstead PC served as borrower’s counsel. Congratulations to the students, families, staff and Board of Uplift on their tremendous results, both in the classroom and in the capital markets.