How to Refinance a Bond Issue for Private School

by Mike Parker

Private schools can finance their capital improvements in a variety of ways, including borrowing from traditional lenders, such as local banks, or by issuing bonds. Depending on how the funds are to be used, a private school may issue either taxable or tax-exempt bonds. In some circumstances, such as an overall drop in prevailing interest rates, a private school might find it advantageous to refinance its existing high-interest bonds by issuing new bonds at the lower prevailing interest rate.

Do the Math

There are a number of costs associated with issuing a private school bond, including legal fees, investment banking fees, real estate- and title-related fees, credit-enhancement fees and others that can add a significant amount to the loan. Compare any savings that may accrue from refinancing the existing bonds with the costs associated with a new bond issue to determine whether refinancing the bonds is advantageous to the school.

Make Sure the Project is Financeable

There are a number of restrictions regarding how funds generated from the sale of school bond may be used. School facilities, such as classrooms, laboratories, auditoriums, transportation vehicles, administrative facilities and sports and recreation facilities typically can be financed. Operating expenses, such as staff salaries and maintenance costs, typically cannot be finance. Private-school facilities that are intended primarily for religious activities, such as chapels, usually are cannot be financed either. Existing bonds or other debt may be refinanced with proceeds from bonds, provided the original expenditures were for projects that qualified to be financed.

Apply with the Appropriate Government Agency

The authority to issue municipal bonds, whether taxable or tax-exempt, resides with the individual states, but there are numerous agencies within the state that may have jurisdiction over a particular bond issue. Agencies that have bond-issuing authority may include local development authorities, downtown development authorities, constitutional authorities, cultural facility authorities and others. Bonds for schools must be issued under the authority of a governmental organization, according to the Smith, Gambrell & Russell website. While private-school bonds are issued under the authority of a governmental organization, neither the state or local agency provides credit for the bond.

Issue the Bonds

Contract with a bond issuer to act as an intermediary for the bond transaction. Once proceeds from the sale are received, redeem the existing bonds or other loans in accordance with the stipulations and covenants contained in the bond agreement. Begin making regular interest payments to the new bond holders.

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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