Elite US prep schools flood muni market after regional bank tumult


Many schools are piling into munis because they need the money to spruce up their campuses. — Bloomberg

LOS ANGELES: Just down the road from Stanford University, a roughly US$200mil campus upgrade is underway at one of the Palo Alto area’s elite private schools, with plans encompassing state-of-the-art classrooms, an aquatics centre and a recording studio.

It’s a massive financial undertaking for the Castilleja School Foundation.

Its leadership considered loans from banks before turning to the municipal bond market, which is more often used to finance roads and bridges than projects at private institutions charging more than US$60,000 a year in tuition.

Castilleja, an all-girls school that opened in 1907, wound up selling about US$106mil of tax-exempt debt in September, its first foray into that market.

It was one of at least 17 US independent private schools that sold municipal bonds in 2024 – several for the first time.

They borrowed US$803mil combined, almost double the previous year’s tally and the most since 2008, data compiled by Bloomberg showed.

Many schools are piling into munis because they need the money to spruce up their campuses as they compete for a dwindling pool of kids, the same demographic pressure that’s straining the finances of small colleges nationwide.

But the regional banking crisis in early 2023, sparked by the Federal Reserve’s aggressive interest-rate increases, gave the trend a major jolt.

Two of the most active lenders to independent schools – First Republic and Silicon Valley Bank (SVB) – collapsed, roiling the multibillion-dollar market for such financing.

Both banks had been among bidders for Castilleja’s loan, according to people familiar with the matter, and the school pivoted to munis after their failures.

First Republic and SVB were banks of choice for many US independent schools because they tailored loans to schools’ needs and offered expertise in the sector, say bankers, financial advisers, school officials and board members, who asked not to be identified.

The banks cultivated the relationships in part to win other business and bolster connections with board members and wealthy parents.

“First Republic Bank, and then probably secondarily Silicon Valley Bank, were two of the most concentrated lenders to independent schools across the country,” said Chad Christoff, a managing director (MD) in Stifel Financial Corp’s education and nonprofit-finance practice.

The firm was an underwriter on 10 of these schools’ muni deals last year.

He’s seen the shift firsthand. Before the banking crisis, more than 10 banks would routinely respond to schools’ requests for financing proposals, and no matter the geographic area, both First Republic and SVB would be expected to bid and were typically the most competitive, he said.

Now, bank participation has become less predictable.

The evolution of this sector is a window into how the once-in-a-generation inflation surge and interest-rate spike that blindsided regional lenders has rippled through the financial system.

The key for schools is that they’re reaping lower borrowing costs now that the US$4 trillion municipal market is vying for their business – a half-point or more lower in some cases, say sources.

And while it’s not exactly a panacea at a time of mounting economic pressure, cheaper financing is a welcome development for schools two years after the banking crisis threatened to shrink their options.

“The silver lining in the bank failures is that many institutions have woken up to the fact that bank financing is not always the most advantageous,” said Dev Talvadkar, a Stifel MD.

San Francisco-based First Republic before its collapse was ubiquitous in private-school banking.

On one occasion before the pandemic, founder Jim Herbert opened up his penthouse home in the city’s tony Nob Hill neighbourhood for an event for nonprofit clients including school leaders, board members and trustees.

First Republic became a leader in lending to schools by offering 30-year, fixed-rate loans with flexible early repayment terms, a combination that wasn’t widely offered in the industry, according to people familiar with the matter. — Bloomberg

Follow us on our official WhatsApp channel for breaking news alerts and key updates!

   

Next In Business News

US AI chip export restrictions to have limited impact on tech sector - Maybank
Bursa Malaysia a sea of red as inflation risk, trade fears continue to bite
SC to unveil toolkit to assist listed companies' transition to meet NSRF compliance
Colform aims to rise RM41.19mil from IPO to fund expansion plans
Affin Bank targets 146 branches by end-2025
Country Garden overdue results show steep losses amid sector's sales slump
Sunway to leverage SEZ, healthcare for growth catalysts
Potential impact from US AI chip restrictions to be minimal for Malaysian contractors - CIMB
Global uncertainties push ringgit to open higher against US$
FBM KLCI finds its footing with positive start

Others Also Read