The loss of a line of credit from a German bank has left scrambling to find a replacement.
The district needs to find a new source for a liquidity facility agreement to help it pay for any 2002 debt bonds that come back. Whatever the result, the district will pay nearly six times the rate it has been paying.
The problem began when the district’s provider of liquidity facility, Heleba Bank in Germany, terminated the agreement. It has been providing the service at very low rate, well below current market rates, Assistant Superintendent for Finances Janice Warner said.
“It’s not us it’s below market rate,” she said about Heleba’s decision. “Being a German bank, they are getting out of the business of general obligation funds in general.”
To find a new provider, the Board of Education approved a motion authorizing Superintendent Scot Graden and Warner to enter into negotiations at a cost that does not exceed 1 percent per annum and subject to a written recommendation from Stauder, Barch and Associates, the district’s financial advisor.
With that mandate, the pair will find a limited pool of banks willing to provide this type of service, Warner said. So far Stauder and Barch have not found anyone willing to provide that liquidity facility, she noted.
“They are still working on it,” Warner said. “But it looks like we are going to have to go a different route.”
The district has three options
- Find a new provider for liquidity facility. There are only three banks that provide such a service: PNC, Wells Fargo and JP Morgan. This will cost more this year as Heleba was charging the school 0.14 percent and the going rate is 0.75 percent.
- A floating rate bond
- A fixed-rate bond, which is more costly.
Paul Stauder, who spoke at the board meeting Tuesday night, said the domestic banks are not stepping in to fill the gap created when Heleba got out.
The negotiations will likely be for floating rate bonds for two to three years, Warner said. These bonds would never be presented to the district to be bought back. Since that is the case, there’s no need for liquidity facility.
“With the current arrangement they could have said on Monday we want to sell them back to you and we need the funds sent to us in a week,” she said. “With this new arrangement we would never have that.
“So we would just sell a floating rate bond and it would be out there for two or three years.”
The floating rate bond options will cost the district a little bit more than current arrangement. Last year the district made a new arrangement and realized $740,000 in savings on the debt bonds. This year, it will cost the district $275,000 to $300,000, Warner said.
“But because of the savings we recognized last year, we are still ahead of the game,” Warner said.
Stauder stressed the need to move quickly on the matter. A final decision has to be made in 10 days, and the new arrangement needs to be executed by Oct. 1.
The bonds are backed by the State of Michigan which has an AA- rating by the Standard and Poor. The district’s bond rating is A+, Stauder said.