Colleges Find New Ways To Do Bond Deals

April 30, 2010 : Boston Business Journal, by Tim McLaughlin

When the credit crisis bloodied the finances of Gordon College and prompted the hiring of a new chief financial officer, the Christian school on Boston's North Shore had to reach deep to restructure its heavy debt load.

Gordon wasn't alone. Strapped with heavy debt from campus building booms to keep pace with rivals, small colleges abruptly found public finance markets less receptive to retooling their bonds during a recession. Instead, Gordon College and others sold their debt directly to banks, a financial maneuver made more attractive by Congress and President Barack Obama.

But before investors would buy Gordon College's $40 million in refinanced debt, they asked for extra collateral to complete the deal. Without fanfare, Gordon mortgaged its entire campus in Wenham — replete with a picturesque chapel steeple and red-brick dorms — to Citizens Bank and GE Government Finance Inc. as extra security on its obligations.

Just two years earlier, the school celebrated happier days, renaming its campus after Dale and Sarah Ann Fowler, who committed $60 million from their estate in the largest gift ever for Gordon. At the time, Gordon College President R. Judson Carlberg described it as a “historic transformational gift to ensure the financial future of this place called into being 118 years ago.”

Ironically, it was Citizens Bank that triggered financial turmoil at Gordon. When the bank was hit with a credit rating downgrade in early 2009, the interest rate on Gordon College bonds rose sharply, as high as 8 percent. In essence, the school's credit rating was tied to the bank. A letter of credit from Citizens served as the financial backstop on Gordon's variable rate bonds.

Gordon College didn't stand still. The school replaced James MacDonald, its senior vice president for finance with a bond funding veteran from the Massachusetts Port Authority. Meanwhile, the value of Gordon's small endowment dropped sharply, and the school's operations produced a $4.6 million deficit on revenue of $47.8 million during the fiscal year that ended June 30.

Today, the school's finances are stable, said Michael Ahearn, who became Gordon's top financial officer on June 1. During the 12 months ended March 31, the school's endowment posted a 30.7 percent return, thanks to a resurgent stock market, Ahearn said.

Still, the school's ratio of long-term debt, as a percentage of total assets, remains above 30 percent. Conservative schools with deeper pockets get nervous when that ratio is above 10 percent.

Gordon plans to raise tuition 3.9 percent for the school year beginning in the fall while boosting financial aid about 8 percent. And for fiscal 2010, which ends June 30, Ahearn said he expects the school's operations to generate a surplus.

“We're managing the budget very carefully,” he said. “All spending decisions are very deliberate.”

The mortgaged campus as extra collateral, he said, is just fallout from a credit crisis.

“The go-go days are over,” Ahearn said. “Everyone is a lot more risk-averse.”

Rather than refinance its debt through the public finance markets, Gordon College opted for a private placement. Citizens and GE bought the school's bonds, which carry an all-in interest rate of 5.89 percent.

Ahearn, who oversaw much bigger bond deals at Massport, said the private placement saved the school time and money. Gordon also no longer needed a bank-issued letter of credit to back its bonds. The letter of credit from Citizens, for example, came with an annual fee of 1.05 percent, costing Gordon some $350,000 a year, according to its financial statements.

Kris Moussette, a partner at top bond counsel firm Edwards Angell Palmer & Dodge LLP, said institutions deemed weaker credits opt for private placements, partly to avoid the scrutiny that typically accompanies a credit rating on a public finance deal. Private placements bonds also have become more attractive for banks.

The American Recovery and Reinvestment Act President Obama signed into law in early 2009 allows banks to deduct 80 percent of the interest on tax-exempt bonds issued by qualified small issuers such as Gordon College. The annual limit for small issuers also was increased to $30 million from $10 million.

Western New England College took advantage of private placement bonds purchased by banks to raise $43 million to finance a building for its new pharmacy school.

“The public bond market was not a feasible alternative for us,” said William Kelleher, vice president for finance and administration at the college.

As in the case of Gordon College, Western New England worked with MassDevelopment to issue its bonds to banks. Kelleher said the lead bank on his school's private placement was the Bank of Western Massachusetts. Merrimack College in North Andover also has completed an $11.5 million private placement deal with a subsidiary of Medford's Century Bank and Trust Co.

Jami Loh, first vice president of investment banking at MassDevelopment, said many times private placement issuers don't have the credit rating to get an attractive interest rate from the public finance sector.

Kelleher agreed. He said Western New England College financed its new debt at a fixed rate of 4.5 percent. “In the public finance market, prevailing rates were significantly higher, north of 6 percent,” he said.

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