Press Release. October, 2009
Kapolei, Hawaii: Six months ago, Island Pacific Academy was like many start-up independent schools. Even though it had enrolled 650 students PK-11 in four years of existence, it struggled to meet the debt service on a $20 million bond issue amidst rising costs and the stagnant enrollment of the current recession. Today, the School has cash reserves and completed the purchase of its property. The debt remains, but the debt service is more manageable, given the school’s comparatively low tuition and enrollment. How did they do it?
“Bond math 101”, says Nick Prassas, financial advisor to the School. Two years ago, the School sold a bond issue at par, at a low fixed interest rate. When the credit crisis hit, interest rates spiked higher. Higher interest rates, lower bond prices. The School was able to negotiate the repurchase of its bond issue from bond holders at a substantial discount.
Of course, the School still needed a source of funds to buy back their discounted bonds. That source: federal stimulus dollars from the United States Department of Agriculture.
“We were at the right place at the right time,” says Stuart Hirstein, Associate Headmaster and Chief Operating Officer. The USDA, which provides rural community facilities financing, became one of the conduits for disbursing federal stimulus funds. The agency, having guaranteed a loan for the School several years ago, was already familiar with our financial profile. We made our request just as stimulus funds were being allocated.
The USDA funds came in the form of a direct loan, and a loan guarantee. The direct loan carries an interest rate of 4.5%, repayable over forty years, instead of the customary thirty.
“It sounds straightforward, now that we’ve closed the transaction,” says Dan White, Headmaster of the School. “The USDA program is designed to support new community initiatives. Fortunately, IPA had received a five-year grant from the Hawaii Community Foundation in their Schools of the Future program. The Schools of the Future process will, in fact, transform our school and represent a genuinely new initiative. Putting the deal together, though, required long hours and hard work by several knowledgeable people.
The notion of a school capitalizing on the USDA stimulus program to buy back their own bonds at a discount, just one year after selling them, is novel.
?Obviously the recession provided fertile ground for thinking outside the norms of independent school finance, added Prassas. Everything we hear, though, about independent schools in the post-recession world would suggest that the old norms are not likely to return.
The schools of the future – 15 to 20 years down the road – might well look very different than today. Why wouldn’t school financing evolve in a similar fashion? asked White. We still need to make enrollment targets, continued White. The debt service is still a huge chunk each month. We continue to be frugal; we have to be. But we have a huge asset our land that we did not have before, and there is great security for the school in that fact.