San Diego Unified School District’s all-green $1 billion mix of taxable and tax exempt general obligation bonds is expected to draw ESG investors when it prices on Tuesday and Wednesday, according to its finance team.
All five series received a green bond designation from Kestrel Verifiers.
“We do think having the green bond designation does help get the deal into a broader set of investors,” said Tyler Old, executive director at J.P. Morgan Securities, one of the lead managers.
A number of ESG mutual funds have sprung up over the past few years resulting in a pricing differential on a couple of deals, but "it's not something that is uniform across all deals,” Old said.
“I think the market believes we will get there over time, but the goal is to attract as many investors into these bonds as we can, and having the green bond label helps,” he said.
The state’s second largest school district with a K-12 enrollment of 99,428 students in its traditional schools has experienced some shuffling at the top after Superintendent Cynthia Marten left in May to accept a position in the Biden administration as deputy secretary of the Department of Education.
Lamont Jackson was named interim superintendent.
Despite the changes, which also included the retirement of its chief financial officer, who was replaced by Jodie Macalos, the school district’s capital projects program remains on track.
The school district is tapping two voter-approved bond measures to issue the tax exempt bonds to pay mainly for modernization projects, but also new facilities. It also plans to price taxable debt to defease existing bonds.
Lead managers J.P. Morgan and Citi will price the bonds in five series: the $225 million Series N split between a $17.9 million federally taxable refunding series N-1 and $207.1 million tax-exempt series N-2; $350 million Series E split between an $18.5 million federally taxable refunding Series E-1 and $331 million tax-exempt Series E-2; and $431 million Series ZR-1, an all-taxable advance refunding.
Goldman Sachs & Co. and UBS are co-managers. KNN is the financial advisor. Orrick, Herrington & Sutcliffe is bond counsel.
The retail order period is set for Tuesday with institutional sales planned for Wednesday.
The series N-1 and E-1 taxables, structured as short-term notes, were rated F1 by Fitch Ratings and K1-plus by Kroll Bond Rating Agency.
The long-term bonds were rated Aa2 by Moody’s Investors Service, AAA by Fitch and AAA by Kroll. All assigned stable outlooks.
The school district serves a region including most of the city of San Diego and roughly 85% of the city’s assessed valuation lies within the district.
The school district was not able to accelerate projects while the schools were closed to in-person learning because of supply chain issues with construction materials, but all of the projects are on track, Macalos said. The schools re-opened for in-person learning in August.
“It was much easier to do projects when there weren’t kids on campus,” Macalos said.
The projects underway include significant modernization at Point Loma High, where some buildings were demolished to make way for new ones.
The school district is also constructing a new elementary school in Mission Hills for 500 students that is slated to open in fall 2022.
The district, governed by a five-member board of education, operates 108 elementary schools, 11 K-8 schools, 24 middle-junior high schools, 22 senior high schools, 11 alternative schools, 17 pre-school sites and four special education centers and sponsors 41 charter schools.
The bonds are issued under Proposition Z, approved by voters in 2012, to a authorize $2.8 billion in GOs, and Measure YY, a $3.5 billion GO ballot measure from 2018.
The bonds are repaid directly from the county, as property taxes are collected, in a lockbox-like system.
The district has a debt policy minimum level of savings at 5% for both taxable and tax exempt, said Mark Young, a KNN managing director.
“We would not be doing a refunding of this magnitude if it was only 5%,” Young said. “The escrow efficiency requirement dictates that the present value savings has a negative arbitrage of less than 50% of the present value savings.”
That negative arbitrage threshold has been a parameter that has kept the school district from pursuing taxable refundings up to this point, Young said.
“In 2021, the refunding date comes closer to the call date of those outstanding bonds, which reduces the negative arbitrage in escrow,” Young said. “In 2021, we are two years away from our call date, so the negative arbitrage number started to drop to the point where we were achieving that escrow efficiency as well as present value savings.
“Our thought is this is a really good time to include the refunding to achieve these savings and to level the remaining tax rate that constituents in the school district will be paying in this program," Young said.
