This document discusses types of variable rate debt that can be issued by Texas independent school districts. It outlines four main types: mode bonds with weekly interest rates and put features; typical variable rate structure with fixed put periods and no put rights; put bonds with weekly floating interest rates and no put rights; and index floating rate bonds subject to maximum rates and federal tax law requirements. Overall it notes variable rate debt may have higher costs than fixed rate bonds but provides flexibility.
1. Variable Rate Debt for Texas School Districts Types of Variable Rate Debt Issuable By Texas Independent School Districts
2. Mode: Interest rate changes weekly (weekly rate). Multimodal: District has ability to switch between various interest rate modes (typically term rate and flexible rate). Put Feature: Bondholders have the right to put bonds on 7 days notice to the District. Interest Payable: 1st Business day of each month. Liquidity Facility: Standby bond purchase agreement required. Failed Remarketing: District not liable to pay purchase price, but interest rate would likely increase to maximum rate, typically 8%. Typical Variable Rate Structure
3. Mode: Interest rate fixed through put period. Mandatory tender at end of put period. Multimodal: District has ability to switch between various interest rate modes. Put Feature: Bondholders DO NOT have the right to put bonds to the District. Interest Payable: Semiannually. Liquidity Facility: No liquidity facility required. Failed Remarketing: Interest rate steps up to the “penalty rate”, typically the maximum interest rate. It is a “soft put” in that there is no default for a failed remarketing. Put Bonds
4. Mode: Interest adjusts weekly based on 7-day SIFMA plus agreed-to spread. Interest Floating Rate Period can be through life of bonds or fixed period (e.g., first three years). Multimodal: District has ability to switch between various interest rate modes. Put Feature: Bondholders DO NOT have the right to put bonds to the District. Interest Payable: 1st Business day of each month or semiannually. Liquidity Facility: No liquidity facility required. Failed Remarketing: Interest rate steps up to the “penalty rate”, typically the maximum rate. Index Floating Rate Bonds(A.K.A. “Flexible Rate Notes” or “FRNs”)
5. 50¢ Test: Calculated at maximum interest rate for any period where rate is unknown, typically 8%. Federal Tax Law: If bonds not issued at par (without premium), not “qualified tender bonds” under federal tax law and so subject to re-issuance risk. Other considerations: Costs of issuance and ongoing costs typically higher than fixed rate bonds. No-call period is typically shorter than fixed rate bonds. General Considerations
