The Connecticut Health and Educational Facilities Authority (CHEFA), the state’s self-funded, quasi-public agency that issues tax-exempt bonds on behalf of nonprofit institutions, has issued about $16 million in bonds so far this fiscal year and will likely issue another $1 billion in bonds by the end of its fiscal year on June 30.
That would be a major boost in activity for the organization, which saw its 2009 bond volume plummet.
In fiscal year 2009, which ended in June, CHEFA issued $341 million in bonds, an 83 percent decline from the nearly $2 billion in bonds it issued in 2008.
CHEFA, which is based in Hartford, issues bonds that give nonprofits access to low-cost financing in public municipal markets. CHEFA’s clientele includes hospitals, colleges and universities, independent schools, and human service and child care providers.
The organization has $6.7 billion in bonds outstanding that were issued on behalf of its clients, said Jeffrey Asher, CHEFA’s executive director.
Asher said the bond volume decline in fiscal 2009 was a result of the turmoil in the credit markets, which caused liquidity to dry up. Bank credit downgrades and the loss of AAA-rated bond insurers also significantly raised the cost of borrowing, particularly for institutions with less than A-rated credit quality.
Both factors forced many of CHEFA’s clients to tighten their belts and postpone capital projects until the economy improves, Asher said.
Conservative Direction
The recession has also significantly changed the way CHEFA does business. Asher said the tax-exempt bond market is moving in a more conservative direction, focusing more on fixed-interest debt rather than the complicated and risky derivative financial products.
Additionally, CHEFA has modified its underwriting guidelines to allow institutions to issue fixed-rate debt as long as their credit rating is investment grade. Prior to the change, CHEFA would generally only allow an institution to issue debt, without credit enhancement, if their rating was “A” or better.
“These changes had to be made so our client institutions could continue to have access to long-term capital debt financing,” Asher said.
But even with bond volume taking a nosedive, CHEFA actually saw an increase in activity, mainly from clients looking to modify the terms of their current loans.
Refinancing Favored
The two deals they’ve helped fund this year, including one for Hopkins School in New Haven, were to refinance.
Recently, CHEFA issued a $7.9 million tax-exempt bond on behalf of The Hopkins School.
The proceeds of the bond issue will be used to refinance Hopkin’s existing 1998 bonds, which were used to fund multiple development and renovation projects on its campus, including the Malone Science Center and Walter Camp Athletic Center.
The refinancing will help reduce the school’s annual debt service by about $55,000, and save it $1 million over the remaining life of the bond, said David Baxter, Hopkin’s chief financial and operating officer.
“The school was able to capitalize on today’s low interest rate environment to reduce costs,” Baxter said.
Yale University is one of CHEFA’s biggest client institutions, with over $2 billion in outstanding debt. Quinnipiac University and the four schools that make up the Connecticut State University System are also major clients.
State Cuts
CHEFA has also had to do more with less. As part of the various deficit mitigation plans that have been enacted over the last year for example, the state absorbed $13.1 million in CHEFA’s reserve funds to help fill holes in the budget.
That forced the organization to terminate a $1 million grant program that was used to aid struggling nonprofits.
They’ve also had to trim their 22 member staff, by one employee.
But Asher said he is hearing from clients that activity will pick up in the next few months, which is why he projects CHEFA will issue another $1 billion in bonds by June. He said even though these are tough economic conditions, it is a good time for some organizations to move ahead with projects because prices for construction have fallen and tax-exempt interest rates are low.
“I think people are starting to take a deep breath and are ready to move forward,” Asher said.
Greg Bordonaro is a Hartford Business Journal staff writer.
