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Minneapolis, MN | November 29, 2022 | Erik Kelly, President
This year has marked a return to “normal” Thanksgiving activities for my family and me, most notably the resumption of large family gatherings that were a mainstay of our pre-pandemic life. The pandemic and, even more so, true illness caused us to take a few years off from those holiday traditions that we loved but could not fully enjoy in the absence of dearly loved friends and relatives. Having the family back together again was, well, usual. But the feeling was different. Perhaps this year more than many beforehand was the thankfulness I felt simply by being together. Yes, even with the in-laws.
Inasmuch as that feeling was held around our family’s Thanksgiving table, so, too, did I have this sense of gratefulness for our team, including my colleagues at Blue Rose and HedgeStar, as we gathered together earlier this fall in Duluth, MN. Our traditional annual gathering was disrupted in recent years, turning what would otherwise be important in-person events into virtual get-togethers that accomplished many - but not all – of the things we hoped for. This year, unlike the prior two, we were able to gather in-person to enjoy the side-by-side work, brainstorming, and camaraderie of being a team. It was a family gathering, if you will. But as I reflected on my appreciation for the most recent iteration of our company’s annual tradition, I realized that what I am most thankful for is each member of our team and their respective contributions to our collective mission. Simply put, I am grateful for my colleagues. Let me explain.
At Blue Rose our mission is to improve organizations by providing advice, services, advocacy, and transparency on complex financial matters. This mission is no small task, as the breadth of challenges and needs of our clients continues to evolve in a post-pandemic operating environment and significantly changing market environment. Yet our team of advisors is tremendously skilled at finding creative solutions in midst of the challenges. In the marketplace generally, for example, the rising interest rate environment and inversion of the yield curve have provided both a dilemma and an opportunity for borrowers. The dilemma is more obvious, as higher interest rate have led to significantly higher interest expense and, in some cases, a detrimental impact on the affordability of a project due to the resulting cash flow. But opportunities in this market environment persist; our advisors have led borrower clients in securing medium- to long-term financing with little near-term cost as the inverted yield curve provided the option to reinvest the bond proceeds at or above the arbitrage yield, which minimizes or perhaps even eliminates negative carrying cost of debt during the construction period.
The skill of our advisors, however, is only one aspect of my appreciation for them. We are extraordinarily fortunate to have assembled a team that prides itself on a culture of service. Of course, in the normal course of business this is a critical element of our day-to-day work, to serve our clients beyond their expectations, often by becoming an extension of their staff. With a team that is willing to put forward the effort to serve clients in this manner, it should not come to anyone’s surprise that they are inherently a service-oriented group outside of the office as well. This fact was on full display as our team elected to volunteer together at the Damiano Center in Duluth during our annual meeting. The Damiano Center serves people in need, including by being the largest emergency meal provider in Northeastern Minnesota and having the largest free store in Duluth. We witnessed the impact this non-profit organization has in its community, and it was a true joy to serve alongside my colleagues in this way.
Blue Rose and HedgeStar colleagues at the Damiano Center in Duluth, MN.
As the holiday season continues this year, I will continue to count it a great joy to be able to serve organizations alongside my colleagues in the public and non-profit sectors. While the work may be different than going shoulder-to-shoulder at a place like the Damiano Center, our team’s skill and creativity provide the opportunity to deliver on our mission. To that end, I am thankful for my colleagues, the institutions that we have the privilege of serving, and the many people that we engage with along the way that help us achieve great outcomes. Thank you, and blessings on your holiday season.
Comparable Issues Commentary
Shown below are the results of two higher education financings that priced in the last several months, both for private universities on the edge of the investment-grade/non-investment-grade threshold. On September 21st, Greenville University (“Greenville”) of Illinois priced its tax-exempt Series 2022 (issued through the Arizona Industrial Development Authority). Two weeks later, on October 5th, Capital University (“Capital”) of Ohio priced its tax-exempt Capital University 2022 Project. Capital’s bonds were a multi-purpose issue which served to finance projects on the University’s campus, including improvements to HVAC and roofing, academic and athletic facilities, residence halls, water drainage systems and the student union and library. The transaction also featured a refunding component, which refinanced the University’s outstanding 2013 and 2015 Bonds. Greenville’s deal was a new money issuance that financed housing and athletic facilities on campus, while also funding a debt service reserve fund and over two years of capitalized interest.
Both schools’ bonds carried ratings from Standard & Poor’s (“S&P”). Capital’s bonds were rated “BBB-” while Greenville’s came in one notch lower at “BB+”. The single-notch difference between the two transactions was more notable than in other cases, as Greenville’s “BB+” rating fell out of the investment-grade range, meaningfully impacting the investor universe for the University’s bonds. The credit differences between the two transactions also manifested in the differing security provisions for the two deals, with Greenville’s bonds secured by both a mortgage and DSRF, while Capital’s investment-grade rating enabled it to sell its bonds without either of those two provisions. The two deals were quite similar in size (both ranging between $35M - $38M in total par amount), with Capital’s deal being slightly larger. In contrast, the maturity structures of the bond issues differed materially, with Capital featuring more gradual amortization from 2027-2052 while Greenville’s financing utilized a single bullet maturity in 2053. Greenville’s issuance featured a standard 10-year call provision, while Capital opted for a shorter 8-year call option in 2030.
The week before Greenville’s pricing in late September, MMD continued its steady upward climb as rates rose between 11-18 bps, with the largest cuts during this period over the first five years of the yield curve. MMD increased an additional 8-15 bps during the week of pricing in the two days ahead of Greenville’s bond sale on the 21st, and remained flat across the curve on the day of pricing. Greenville ultimately priced its 2053 bullet maturity at a spread of +331 bps to 30-year MMD.
In the ensuing two weeks before Capital’s pricing, MMD continued to rise sharply on the front of the curve. Maturities within the first five years of the curve saw cuts of 31-40 bps and six-to-ten-year maturities increased by 18-29 bps, while the longer end of the curve saw more relatively modest cuts of 4-10 bps. MMD was fairly stable on the day of Capital’s pricing, aside from smaller bumps of 2-4 bps on the front of the curve. Capital achieved spreads ranging from 188-197 bps on its serial maturities and 207-216 on its four term bonds, with the ~115 bp spread gap between the longest maturities of the two transactions evidencing the substantial pricing differential for investment-grade and sub-investment grade borrowers.
Interest Rates
Erik Kelly | ekelly@blueroseadvisors.com | 952-746-6055
Erik Kelly serves as President of Blue Rose, providing leadership, coordination, and oversight of the firm’s advisory services since 2011. Mr. Kelly contributes to the strategic direction for the firm, oversees compliance with the changing regulatory environment, and ensures the quality of professional advice provided to the firm’s clients.
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