In December 2020, KIPP SoCal issued $33,410,000 in tax-exempt bonds through the California School Finance Authority, the fifth in what has become a series of very well-received bond issues that began in 2014. The issue maintained SoCal’s “BBB” rating from SP Global.
This issue is funding about $6MM towards leasehold improvements for KIPP Promesa Prep, which operates in the Boyle Heights neighborhood, and about $29MM towards the construction of a K-8 facility for KIPP Pueblo Unido in Cudahy. SoCal will manage the Promesa project, and has engaged Pacific Charter School Development to mange the Pueblo Unido project on its behalf. SoCal now operates 20 schools under 17 separate charters on 22 campuses throughout Los Angeles, Compton, and San Diego, and plans to grow to 22 schools by 2021.
To fund these projects, SoCal persevered through several obstacles associated with the Pueblo Unido project. After receiving all approvals to proceed, a lawsuit was filed by two individuals claiming, among other things, that the City of Cudahy did not correctly follow its own regulations for approving such projects. Though the outcome of this lawsuit is likely to be favorable to SoCal, it was necessary to anticipate the worst by incorporating an Extraordinary Mandatory Redemption feature for a certain period of time. Much appreciation is owed to CSFA Executive Director Katrina Johantgen and her staff, as well as California State Treasurer Fiona Ma and her staff in the State Treasurer’s Office, who worked diligently with us to understand the need for this feature throughout the issuance process. Purely speculation on my part, but the plaintiffs in the lawsuit appear to be working on behalf of the local LAUSD teacher’s union. Its walking like a duck, and talking like a duck, so ….
The incorporation of the EMR feature did not adversely affect the reception of the bond issue by investors, however, with the issue receiving well over $300 million in orders for what was a intended to be a $36 million bond issue. Using 4% coupons throughout the callable portion of the scale, a premium of over $5.6 million was generated because we were able to drive yields very low, and drive the par down to $33.4 million. The TIC for the issue came in right at 3% for a 35-year maturity. Recent similarly rated Cal charter bond issues had used a 5% coupon, which has a higher yield-to-maturity if not redeemed early. At these levels of interest rates, we were less interested in the “optionality” of a higher coupon and the cost which comes with it. Based upon this result, SoCal continues to outperform in the capital markets as they do in the classroom.
Buck Financial Advisors LLC served as financial advisor to SoCal on this issue. Robert W. Baird & Co. Inc. served as underwriter, and Akin Gump Strauss Hauer and Feld LLP served as borrower’s counsel. Orrick Herrington & Sutcliffe LLP served as bond counsel, Quarles & Brady LLP served as underwriter’s counsel, and Zions Bancorporation, National Association is the Trustee. This is the last capital markets issue over which Founder & CEO Marcia Aaron will preside, as she is retiring at the end of the current school year in June 2021. After 13 years at the helm, Marcia and her team have built SoCal into one of the highest performing charter organizations in the country. Both the organization’s results, and the quality team that she has built, are a testament to the talent, perseverance and drive that Marcia brought to SoCal. SoCal’s deep bench is exemplified by the naming of current Chief Academic Officer Angella Martinez as Marcia’s replacement. So congrats to KIPP SoCal, and its students and families on another successful bond issue. and best wishes to Marcia for a long and enjoyable retirement. It’s well deserved.