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Providence Financial









MONTHLY NEWSLETTER:  AUGUST 2006 ISSUE

LEVEL THE PLAYING FIELD
BY BRENT VAN ALFEN, PROVIDENCE FINANCIAL COMPANY, INC.


It is common knowledge that certain personal characteristics and accomplishments must be attained before one can get into heaven. What is not so commonly known is that the final test that educators must pass before entrance to the pearly gates is a spelling test that is administered by Saint Peter. Here is an account of such a test.

A man arrives at the entrance to heaven and St. Peter asks him what his profession was in life. The man answered that he was a public school teacher. St. Peter then asks him to spell the word “peace,” and he easily gained entrance.

Next, a woman approached St. Peter and was asked her profession while on earth. After responding that she was a public school administrator, she was asked to spell the work “afternoon” and immediately passed through to heaven.

Then a man approached St. Peter and was asked the same question to which he answered that he was a teacher at a charter school. He was then asked to spell the word “Albuquerque”! This man did not make the cut, and was hauled off to another eternal destination.

Sometimes it seems like charter schools are not on a fair playing field with their counterparts in the public and private school sectors. Recently, I reviewed all of the charter school bond underwritings in nine states from 2000 to the present. I don’t think I got all that were actually done, but I got all that were available in the Thompson database. It was very interesting to see the differences among states, underwriters, etc. with regard to the cost of the issue. The greatest discrepancy, of course, is the difference between charter school facility costs and the cost of public school facilities. Let’s face it, this facet of life is not fair. Public school facilities are often extravagant and cost the school nothing out of their budget. Charter school facilities are modest and cost a chunk out of their budget. This discrepancy will not likely be corrected anytime soon, at least in most states.

The discrepancies between financing costs of various charter schools are, for the most part, manageable and should be addressed before a financing commences. Here are some examples.

Good underwriters will put your bonds on the market and let their sales force get bids from potential investors. This assures you of the best pricing available.

Underwriter’s discount is what the underwriter charges for putting the marketing package together and selling the bonds to investors. The range in this charge, expressed as a percent of the overall bond issue, is .75% to 4%. Part of this spread is a reflection of the type of bond issue it is, but it is also a result of the underwriter’s assessment of what the market will bear.

Cost of Issuance is the total of all costs resulting from getting the deal done. As I noted in my June newsletter article, I found a spread from 7.66% to 10.95% in state averages for this cost category. Why is there such a difference? Often, neither the school nor their attorney is aggressive enough to ask for lower prices and fees from the others involved. Often, it is a matter of asking for a better price and asking for an itemized billing, etc. Be a good consumer.

As noted in the June article, interest rates can be affected by several things, but the main one is the underwriter. Good underwriters will put your bonds on the market and let their sales force get bids from potential investors. This assures you of the best pricing available. I know one underwriter, however, that simply packages the deal and takes it to his friends who manage a high-yield bond fund and sells the whole issue to them. Nobody is looking out for the school. In my experience, this has the net effect of adding about one-half of a percent to your interest rate. It is easier for the underwriter but certainly not in the school’s best interest

From doing this survey and by experience, I have learned which underwriters are the most efficient at getting a charter school underwriting completed. I have also learned which ones will offer the school a fair price and put some effort into the job. Give me a call if you are planning to do a charter school facility financing. I’d be glad to help you level the playing field.

Phone: 801-299-8555
Email: brent@providencefinancialco.com