Thanks to a reaffirmation of its top-notch credit rating and a timely bond sale, Harvard now has the cash it needs this fiscal year to prepare for construction of its new elementary school.
Finance Director David Nalchajian announced Friday that the town had successfully sold a one-year, $5.5 million bond anticipation note (BAN) to investment banker Piper Jaffray & Co., one of five companies to bid on the note. The company’s winning bid asked 3 percent interest but included an upfront cash payment, or premium, to the town of $68,000. Competing bidders proposed interest rates that ranged from 2.85 percent to 3 percent with smaller cash premiums, according to Nalchajian.
The $68,000 premium will be used to pay the estimated $20,000 cost of preparing, vetting, and offering the BAN to the municipal bond marketplace. Nalchajian said the remaining amount would be set aside to pay down current or future debt. He said the extra money had the effect of reducing the school BAN’s 3 percent interest rate to 1.75 percent.
The BAN sale was completed August 10, a month later than planned, due to delays in the signing of a project funding agreement with the Massachusetts School Building Authority (MSBA) and the town’s decision to seek a reaffirmation of its AAA bond rating, thereby extending the rating’s life an additional two years. However, the amount and interest rate of the loan match those proposed by the School Building Committee in the financial plan it presented to the town this spring, and the delay has not slowed planning for the new school. Since late June, the School Building Committee has been paying its bills with money from the Devens fund, the amount MassDevelopment pays Harvard schools for educating students who live in Devens. The School Committee authorized the building committee to borrow up to $1 million from that fund during July and August, with the sum to be repaid from the BAN.
With principal and interest due Aug. 23, 2019, there is no impact to taxpayers this fiscal year. Next August, Nalchajian told the Press, the town will either issue a new short-term BAN or borrow the entire amount it needs to pay its portion of the project. The town’s portion was estimated this spring to be $34.8 million, but the final amount won’t be known until the town solicits and receives bids from subcontractors for the construction phase of project. The state is expected to contribute more than $18 million.
AAA rating reaffirmed
There was additional good news for the town in Standard and Poor’s latest review of the town’s credit worthiness. Last Wednesday, the rating agency reaffirmed Harvard’s AAA rating, the highest of any town in Worcester County and higher than the state’s current AA rating. Harvard’s rating prompted an SP-1+ rating—the highest available—for the BAN itself. According to Nalchajian the renewed AAA rating is good for two years, the period within which Harvard will go to market with a 25-year bond to pay for its share of the project.
In their report on the BAN, S&P analysts wrote, “Harvard maintains a very strong capacity to pay principal and interest when the notes come due. The town has what we view as a low market risk profile because it has strong legal authority to issue long-term debt to take out the notes and is a frequent issuer that regularly provides ongoing disclosure to market participants.”
In reaffirming the town’s AAA long-term debt rating, the analysts cited “Harvard’s very strong economy, coupled with good management practices, leading to strong budgetary performance and robust reserves and liquidity.” As a result, they did not anticipate changing the rating “in our two-year outlook horizon.”
They warned, however, they could change their rating should the town’s debt profile weaken significantly, “with large increases in outstanding debt relative to governmental revenue and/or materially greater debt service carrying charges, or … increases in fixed costs from growing long-term liabilities or debt or a weakening economy.”
