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Providence Financial



Recently, I was meeting with the board of a charter school comprised mostly of attractive women. About a third of the way into my presentation, I sat on the edge of a table at the front of the room; and as I placed my hands in my lap, I noticed that my fly was unzipped. I am quite proud of how cool I remained. Usually, when I am in front of people and things are not going well, I break out in a profuse sweat! In this case, however, I just held my notes in front of me with one hand while I zipped with the other. At least I didn’t catch my underwear in the zipper! When this stealth maneuver was complete, I apologized and assured the ladies that I did not leave my zipper down intentionally. They were very kind and assured me in return that they hadn’t noticed anyway. As I think back on the embarrassing situation, I’m not sure whether it’s a good thing or a bad thing that they didn’t notice. I will have to think about that a while longer.

During the process of financing a charter school facility, there is potential for surprises that are even more serious than my unzipped fly. At some point in the complex financing process, the inexperienced or unwary may find that there are some unpleasant surprises during the documentation process. The only thing worse than that is finding some unpleasant surprises a few years after you signed those documents. I know several people who wanted to expand their facilities and found that their bond documents they signed a couple years before prevent them from doing that. “Okay,” they said, “let’s refinance the bonds and do the expansion with the new financing.” But there is another surprise in the form of a prepayment penalty that is rather pompously called a “defeasance” by the attorneys and underwriters. It is very easy to sign documents that contain potential land mines that rear their ugly heads when you least expect them.

Another huge surprise can occur when you compare the coupon rate on your bonds to some others that you may become aware of after your bond offering is complete. For example, I became aware of the pricing of three underwritings last week that I want to use as examples of how it is easy to get into a facility financing that may become a disappointment. They were all tax-exempt bond underwritings; and before I get started, it is important to keep in mind that many things can affect the pricing of a bond issue. I am using these as an illustration of how some surprises can become very expensive.

There are many potentially expensive landmines in the documentation that the inexperienced person does not see coming.

The coupon rate on one was 6.25% while another was 5.9% and another was 5.625%. That is a difference of 0.625% between the highest and the lowest. That does not seem like much now does it? The approximate monthly principal and interest payment on a $5M loan for 30 years for those rates is as follows: 5.625% = $28,783 ,  
5.9% = $29,657 ,   6.25% = $30,786.

The difference over the 30-year life of the loan at the above payments is approximately as follows:   Savings for 5.9% vs. 5.625% is: $314,640,    Savings for 6.25% vs. 5.9% is: $406,390,   
Savings for 6.25% vs. 5.624% is: $721,030.

It is plain to see that a seemingly small difference in the coupon rate adds up to a substantial savings. Savings in the costs of issuance, while they can be significant, do not magnify as much as a savings in the coupon rate. If, in your $5M financing over 30 years at 6%, you save 1% in the cost of issuance, it becomes approximately a 2% total savings after the last payment is made 30 years later.

I received an email recently from a charter school director saying she wishes that I could still get involved in her financing, which is well under way, and rescue her from that “nightmare.” Her school is going it alone in their tax-exempt bond financing and trying to make sense of what is going on. They have no idea where they could negotiate concessions and what issues may become very important to them later which they do not recognize now. There are many potentially expensive landmines in the documentation that the inexperienced person does not see coming. The enormous amount of time it is taking them has also been an unpleasant surprise.

An experienced, competent financial advisor can not only save your school money on a facility financing, but he/she will materially assist you in the documentation process. Not only will you get a tremendous amount of help with the work and time involved, but you should get documents that are relatively more favorable to the school in their terms. By the way, I know where you can find an excellent financial advisor; and I promise his fly will be zipped up!

For information contact Brent Van Alfen, President, Providence Financial Co., Inc.
801-299-8555, brent@providencefinancialco.com,