RUNNING HEAD: GHEFA BOND REFUNDING
Response to a Request to Solve the GHEFA Bond Refunding Problem
© J. Escobar, T. Auton, M. Clausse, C. Bolski 12 December 2015. All Rights Reserved.
Arizona State University
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RUNNING HEAD: GHEFA BOND REFUNDING
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Executive Summary and Introduction (Escobar)
Response to a Request to Solve the GHEFA Bond Refunding Problem
Executive Summary. Our goal is to assist the Georgia Higher Education Facilities
Authority (GHEFA) in refunding some or a portion of its outstanding revenue bonds.
GHEFA is concerned with the rating of its original bonds which received an A1 from
Moody’s Investors Services. As the underwriters taking on the reissue, our team will need
to analyze the impact of the reissue on GHEFA’s credit rating. Our team recommends
keeping Moody’s as the rating service, but are analyzing other rating issuers and their
proposed ratings. Any proposed rating that is similar to the A1 rating from other agencies
besides Moody’s should not affect GHEFA’s future ability to borrow and if we believe
that another agency would lower the bonds rating to anything lower than an A1 or the
equivalent, we would seek to avoid that agency’s rating as we do not want to negatively
affect GHEFA’s ability to borrow. Overall, we would seek a positive or neutral rating
from the original A1 rating for the reissued bonds.
The GHEFA has tasked us with a way to market the refunding to the public. Since
the GHEFA is a public institution, the response to the public would be one that claims
that the reissue is something that is being made for an “investment in the future”. Another
issue that GHEFA has tasked our team with is looking into any type of federal loan
programs or taxable bonds that may be used in the refinancing structure. Our team would
have to research any type of program that will meet GHEFA’s goal and we would begin
with looking into programs created with the American Recovery and Reinvestment act.
Our team has researched both the possible ways for GHEFA to be successful with raising
RUNNING HEAD: GHEFA BOND REFUNDING
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funds through refunding revenue bonds and also determined what the possible threats and
risks GHEFA could experience through refunding revenue bonds. As underwriters to the
bond reissue, our team is taking the risk of being unable to sell the bonds to end
investors. To reduce the risk associated with taking on the reissue, we will market the
new bonds as an investment in the future of Georgia. Since the revenue by the bonds are
used to build facilities, we will showcase all the different types of facilities that were
obtained and/or constructed, their purpose, and how they benefited the public by all other
bonds issued. Our team has looked at examples of institutions who successfully marketed
their bond reissues as an investment like the city of San Antonio in Texas. The bond
reissue by the city of San Antonio demonstrations that this plan has a history of being
successful. By imitating the strategy used by San Antonio to raise funds by reissuing
bonds, we believe GHEFA can also successfully raise funds for higher education by
refunding revenue bonds. In order to gain support from the general public, we
recommended GHEFA to tell the public that by supporting these revenue bonds, they will
also be supporting the future of both the children and the state of Georgia by providing
funds needed for higher education. Another potential avenue GHEFA could look into is
Social Impact Bonds (SIBs). If bonds are advertised as SIBs, not only will investors see
the bonds as a safe investment, but also as an investment in the community and the
overall welfare of the Georgia public education system. Again, releasing quarterly
financial reports and making policies and guidelines publicly available to potential
investors is another way to advertise the bond’s security to potential investors. We expect
RUNNING HEAD: GHEFA BOND REFUNDING
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a successful bond reissue for GHEFA that will save you time, money, and keep your
borrowing ability intact.
Section One – Introduction (Escobar)
The Georgia Higher Education Facilities Authority (GHEFA) is a five member board whose
purpose is to finance the acquisition, construction, and equipping of facilities for public
institutions of education in Georgia. Currently, the GHEFA is seeking to refund the 2008 bond
series using all of the proceeds from Series 2015 Bonds. Advanced refunding bonds is one way
to avoid debt on high interest rates. However, federal tax laws can make this extremely difficult.
If GHEFA were to forward bond purchasing rights a lot of these incurred costs could be spared.
Additionally, if the GHEFA wishes they should forecast the future coupon rates at maturity for
the next five years to investors. Investors will be more likely to hold out for higher coupon rates
and continue purchasing GHEFA bonds. Accordingly, the coupon rates should increase at lower
rates and more steadily rather than the steep growth that GHEFA originally proposed.
GHEFA is concerned with the credit rating of the new issued bonds. Our team would analyze the
effect of a new bond issue and the expected credit rating for the bonds. GHEFA used Moody’s
Financial Services for the previous bond issues and received a credit rating on the bonds of A1.
Refund bonds typically have an AAA rating (the highest possible rating) due to the cash backing
that is implicated to have been set aside. While the AAA perfect score would be ideal, Moody’s
classifies an ‘A’ rating as one of the top ratings that an issuer may receive and insures investors
that the possibility of default is very low. However, should the GHEFA wish to increase their
rating, they should establish a guideline of written policies and make these guidelines available
RUNNING HEAD: GHEFA BOND REFUNDING
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to investors, update expenditure forecasting every six months, and provide semiannual financial
reports as interest is due.
Our team recommends GHEFA has controls in place to avoid any illegal or fraudulent
activities associated to reissuing the bonds, such as yield burning and fraudulent financial reports
and forecasts. GHEFA should avoid these illegal practices to ensure that it is successful in its
goal of raising funds for education in Georgia. By establishing a set of internal controls, we
believe GHEFA can be successful with reissuing these bonds and protect its public image as a
trustworthy organization committed to benefiting the community.
Section 2 - Data and Methods (Clausse)
Our firm was tasked with researching various methods to increase the success of the Georgia
Higher Education Facilities Authority’s (GHEFA) 2015 bond refunding series. We isolated
several strategies that can help the board have a successful year. Firstly, the firm advises that the
board sticks with Moody’s Investors Services to provide the investment rating and strongly
consider several strategies to improve their credit rating. Additionally, we strongly advise that
you (the board), begin advertising the bonds as Social Impact Bonds in order to increase public
interest and generate larger revenue in the upcoming year. Finally, we strongly advise against
refunding the bonds in advanced as this could bring down certain legal repercussions.
GHEFA currently has a credit rating of A1 from Moody’s Investors Service. Although this is not
the highest possible credit rating an organization can receive from Moody’s, a credit rating of A1
indicates that GHEFA is a trustworthy organization that has a low chance of defaulting and a
high chance of meeting its financial obligations.
Since GHEFA already has a relatively high credit rating, our team believes that you
RUNNING HEAD: GHEFA BOND REFUNDING
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should be able to refund these revenue bonds successfully without negatively impacting its credit
rating. However, our team has recommended you to hire an analysts to determine and research
any possible threats to the credit rating of GHEFA. They then can present their findings to
GHEFA at the end of every financial quarter. We believe that this will help GHEFA to avoid, or
at least minimize, any negative effects that refunding these revenue bonds will have on its credit
rating.
We looked at the methods Moody’s financial services uses in approaching credit ratings to
estimate the bond rating for the 2015 bonds. Moody states that the credit quality of issuers, like
their obligations, is not fixed and steady over time. This means that an update and change in the
ratings can occur periodically. Moody’s also states that changes in ratings are expected more in
bonds with lower ratings than those with higher ones. Since a rating from Moody’s, and any
other rating agency for that matter, is simply an opinion of the credit quality of the bond issuer,
our team does not feel that the credit rating of GHEFA needs to be rated by any other agency
besides Moody’s.
Moody’s Rating System originally began in 1909 as way to rate securities and forecast
the issuer’s reliability to the investor. (Moodys.com) The rating system ranges from: AAA, AA,
A, BAA, BA, B, CAA, CA, C. AAA is the highest possible rating that an issuer can receive and
C is the lowest possible rating. According to Moody’s Investor Services, a ‘AAA’ means that
issuer has an exceptional degree of credibility and can easily meet their financial commitments.
Obligations rated C are the lowest rated and are typically in default, with little prospect for
recovery of principal or interest. Currently, GHEFA bond investments are rated A, which
Moody’s classifies as upper grade investments with low risks. However, this a rating of ‘AAA’
RUNNING HEAD: GHEFA BOND REFUNDING
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or higher is unlikely to be assigned if the bonds are not being issued from a large corporation.
Therefore, GHEFA’s rating is nearly at its peak for a firm of its size.
Currently, there are three main credit rating agencies: Standard & Poor’s, Moody’s, and Fitch
Group. These three firms have a collective global share of 95%. Standard & Poor’s and
Moody’s each has a 40% share and the Fitch Group has about a 15% market share. (Hill)
GHEFA’s investments are currently rated by Moody’s, which means it is currently being
evaluated by one of the largest and most trustworthy firms in the market. This is why we are
certain switching to a different credit rating agency would be unlikely to result in an alternate
score.
Additionally, the firm has been tasked with evaluating different marketing strategies to
market the refunding to the public and encourage reinvestment. Social Impact Bonds (SIB’s) are
a relatively new concept that made their debut in the United Kingdom in 2010. (Travis) 'A
Social Impact Bond is a specific type of financing that raises fund from Investors to provide
Social Service Provider(s) (programs and companies with a specific focus on social welfare)
with the working capital to deliver their services. The GHEFA was created entirely for the
purpose of “financing the acquisition, construction, and equipping of facilities for the benefit of
public colleges, universities, and technical colleges of the state of Georgia.” (gsfic.georgia.gov)
you should bolster their image as a social service provider and the bond reissue as “an
investment in the future.” Marketing bonds as SIB’s has been proven to successfully boost
private interest and private investment.
The firm has also been tasked with finding methods to maximize revenue during the
refunding of these bonds. While advanced refunding might seem like the most straightforward
RUNNING HEAD: GHEFA BOND REFUNDING
solution, advanced refunding of bonds can create a legal web and mess that may put GHEFA’s
credit rating at risk. Advanced bond refunding is often seen as a way to circumvent paying tax
rates. Therefore, we strong advise continuing to use the refunding strategy that is already in
place as shown in Figure 1.
Figure 1. Principle of Bonds At Maturity. Georgia Higher Education Facilities Authority
(“GHEFA”) Request for Proposals (“RFP”) for Underwriters. (n.d.). Retrieved December 11,
2015,
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Section 3 - Analysis (Bullski)
Our team has determined several steps that we recommend for GHEFA to follow in order
to increase the chance of GHEFA being successful with raising funds for higher education in the
state of Georgia. GHEFA will achieve their goal by gaining support from the public, minimizing
the risk of any negative effects on the credit rating, and reduce the chance of illegal activity
relating to the refunding of these revenue bonds. In addition, following these steps will help
GHEFA avoid the risks and failures that other entities have experienced when trying to refund
their previously issued bonds. From our team’s research, we have determined that GHEFA has an
A1 credit rating from Moody’s Investors Service. This credit rating implies that GHEFA is a
trustworthy and reliable issuer that is not likely to default. This relatively good credit rating helps
GHEFA with borrowing; therefore, GHEFA would like to reduce the possibility that refunding
these revenue bonds will lower this credit rating and damage its ability to borrow. In addition,
some issuers have practiced yield burning, which is considered an illegal and fraudulent activity.
Our team sees this as a risk for GHEFA that could both prevent GHEFA from achieving its goal
of raising funds for higher education and damage the public image of GHEFA. Our team has
decided that it would be best to find a way to avoid these risks to GHEFA while increase the
likelihood of success for GHEFA raising funds for higher education.
The first step that our team recommends for GHEFA is to gain public support for the
refunding of these revenue bonds. We have determined two possible ways to complete this step.
The first way is to start a campaign that will portray the refunding of these revenue bonds as an
investment in the future of the state of Georgia. GHEFA will inform public that by supporting the
refunding of these revenue bonds, they will be supporting the future of Georgia by providing
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funds for higher education. The primary costs of this campaign will be creating a budget for a
campaign staff and public relations staff. These costs are reasonable given that investing in a
campaign staff will help GHEFA be more likely to succeed in achieving its goal of refunding
these bonds. The second way for GHEFA to complete this step is by using Social Impact Bonds
to refund the revenue bonds. This will help GHEFA convince the public that refunding these
revenue bonds will benefit the community and be a safe investment in the future of Georgia. One
possible threat from using Social Impact Bonds is that they do not have a long history and have
not always been successful in raising funds. Our team believes that GHEFA can be successful
with issuing Social Impact Bonds by monitoring the state of these bonds every financial quarter
and determining ways to minimize risks associated with these bonds every financial quarter.
The second step we have recommended for GHEFA to follow is to constantly and
consistently watch for any threats to its credit rating resulting from refunding these bonds. We
believe GHEFA should analyze the risks related to these bonds every financial quarter and
discuss how to avoid or minimize the negative effect of these risks on GHEFA’s credit rating, if
at all possible. This will help GHEFA assess possible risks to its credit rating and minimize any
negative impacts on its credit rating to avoid damaging the ability of GHEFA to borrow in the
future. The main costs of the second step will be hiring a group of analysts to research the risks
and the financial consequences of these risks every financial quarter on the credit rating of
GHEFA. This cost is justified by the minimization of the possible negative effects on the ability
of GHEFA to borrow in the future resulting from a downgrading of the credit rating of GHEFA.
Our team believes that by hiring analysts to constantly monitor risks relating to refunding
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revenue bonds, GHEFA will be able to successfully raise funds for higher education while
reducing the risk of a downgrade of its credit rating.
The third step we have recommended for GHEFA to follow is setting up a committee to
prevent any illegal or fraudulent activities relating to the refunding of these revenue bonds. The
main costs of the third step involve setting up and hiring the right people to manage these
internal controls. The right people should be people who have had successful experiences in
managing the internal controls of a company or organization. These people will make
assessments about the activities and decisions made relating to the refunding of these revenue
bonds and determine whether or not these activities and decisions are legal and ethical. One
illegal practice GHEFA should avoid is the practice of yield burning, which is an illegal and
fraudulent activity some investment banks have engaged in when selling bonds. Another illegal
practice our team wants GHEFA to avoid is any fraudulent or unethical decisions or actions made
by the analysts to prevent a downgrade in the credit rating of GHEFA. Although avoiding a
downgrade in GHEFA’s credit rating is important, it is more important for GHEFA to remain a
trustworthy and ethical organization. Our team believes that setting up a committee to review the
actions of GHEFA relating to refunding these revenue bonds to avoid any illegal activities will
not only help GHEFA achieve its goal of providing funding for higher education, but also help
protect the public image of GHEFA. This will result in GHEFA being seen as a trustworthy and
ethical entity that is interested in benefiting the community and increase the likelihood that
citizens will support future initiatives by GHEFA.
Our team recommends GHEFA to follow the following three steps to be successful: 1. Create a
campaign to gain public support, 2. Hire a group of analysts to determine risks to the credit
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rating of GHEFA, and 3. Set up a committee to prevent any illegal activities. We believe that
following these three steps will help GHEFA avoid the failures that other entities have
experienced when refunding bonds. GHEFA can increase the likelihood of its success with
raising funds for higher education by following these three steps that our team have developed.
Our team believes that these three steps will help GHEFA successfully raise funds for higher
education by refunding revenue bonds as a result of gaining public support, preventing any
damage to its credit rating, and protecting its public image.
Section 4 – Conclusion (Blotto)
Our team predicts that GHEFA will be successful with raising funds by refunding revenue bonds
if GHEFA follows the three steps our team developed as well as taking the initiative of
developing a new marketing strategy. Following our recommended steps will allow GHEFA to
reach their financial goals. Implementing our team’s marketing strategy will further promote
GHEFA’s success. Gaining public support, hiring an analysis and internal control managers, as
well as adopting new marketing techniques will all contribute to optimizing GHEFA’s success.
The first step will ensure that GHEFA gains enough support from the public. This will help
GHEFA successfully refund the social impact bonds in order to raise funding for higher
education in the state of Georgia. If the public sees the social impact bonds as an investment in
the future well-being of their community, they will be more likely to support this initiative and
increase the likelihood of GHEFA being successful with raising funds for higher education.
Step two of our team’s plan will help avoid or reduce any negative effects that refunding
these revenue bonds could have on the credit rating of GHEFA. We believe that thHEFA will be
seen as a trustworthy and transparent organization that has a low chance of defaulting. This will
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help GHEFA retain public support for the social impact bonds used to raise funds for higher
education. In addition, we predict that lowering the chance of a downgrade to GHEFA’s credit
rating will help GHEFA fund future initiatives by not negatively impacting the borrowing ability
of GHEFA. This will help GHEFA in the future if GHEFA decides to raise funds again by using
social impact bonds.
Step three will prevent GHEFA from committing any illegal or fraudulent activities
relating to the refunding of these revenue bonds. The investment in internal control managers
will benefit GHEFA by ensuring that all actions and decisions relating to these social impact
bonds are legal and ethical. As a result, GHEFA will avoid committing any illegal or fraudulent
activities relating to refunding bonds, such as yield burning or fraudulent reports by the analysts
in order to prevent a downgrade to GHEFA’s credit rating. By avoiding any possible illegal or
unethical practices relating to refunding revenue bonds, GHEFA will not only be able to
successfully reach its goal of funding higher education but also protect its public image.
Avoiding illegal activities will convince the public that GHEFA is a trustworthy organization
whose sole purpose is to find ways to benefit the community. This will help GHEFA with
achieving its goal of funding higher education using social impact bonds and also help GHEFA
gain support from the public for future initiatives. The public is more likely to support an
organization that they see as having a history of being ethical and transparent. Therefore, GHEFA
will benefit by hiring internal control managers who will prevent GHEFA from committing any
illegal or fraudulent activities relating to the social impact bonds.
Furthermore, there are many individual aspects our team was tasked with researching in
order to vastly improve GHEFA’s upcoming bond refunding. Not only were we tasked with
RUNNING HEAD: GHEFA BOND REFUNDING
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improving revenue, but also with increasing private interest. As mentioned previously, Moody’s
is one of the largest and most trusted credit rating agencies in the world and therefore GHEFA
should continue to use Moody’s as their credit rating agency. Additionally, the A1 rating
assigned to GHEFA’s bond by Moody’s is about as high of a rating as GHEFA can reasonably
expect from any agency considering the fact that GHEFA is not a large corporation and only
large corporations are capable of receiving ‘AAA’ ratings.
It is highly advisable to implement a new marketing strategy to increase private interest
in the bonds. Advertising the bonds as an “investment in the future and the community” has
been proven to increase private interest in the past. Although Social Impact Bonds are a
relatively new concept, they have proven themselves to be a trustworthy strategy and GHEFA
should advertise their bonds as not only a financial investment, but also an investment in the
community. San Antonio school systems have used this strategy in the past and it was very
successful.e initial cost of hiring analysts to report any risks they see every financial quarter is
outweighed by the minimization of the risk of a downgrade to the credit rating of GHEFA. This
will help GHEFA with achieving its goal of funding higher education because GHEFA will be
seen as a trustworthy and transparent organization that has a low chance of defaulting. This will
help GHEFA retain public support for the social impact bonds used to raise funds for higher
education. In addition, we predict that lowering the chance of a downgrade to GHEFA’s credit
rating will help GHEFA fund future initiatives by not negatively impacting the borrowing ability
of GHEFA. This will help GHEFA in the future if GHEFA decides to raise funds again by using
social impact bonds.
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Step three will prevent GHEFA from committing any illegal or fraudulent activities
relating to the refunding of these revenue bonds. The investment in internal control managers
will benefit GHEFA by ensuring that all actions and decisions relating to these social impact
bonds are legal and ethical. As a result, GHEFA will avoid committing any illegal or fraudulent
activities relating to refunding bonds, such as yield burning or fraudulent reports by the analysts
in order to prevent a downgrade to GHEFA’s credit rating. By avoiding any possible illegal or
unethical practices relating to refunding revenue bonds, GHEFA will not only be able to
successfully reach its goal of funding higher education but also protect its public image.
Avoiding illegal activities will convince the public that GHEFA is a trustworthy organization
whose sole purpose is to find ways to benefit the community. This will help GHEFA with
achieving its goal of funding higher education using social impact bonds and also help GHEFA
gain support from the public for future initiatives. The public is more likely to support an
organization that they see as having a history of being ethical and transparent. Therefore, GHEFA
will benefit by hiring internal control managers who will prevent GHEFA from committing any
illegal or fraudulent activities relating to the social impact bonds.
Furthermore, there are many individual aspects our team was tasked with researching in
order to vastly improve GHEFA’s upcoming bond refunding. Not only were we tasked with
improving revenue, but also with increasing private interest. As mentioned previously, Moody’s
is one of the largest and most trusted credit rating agencies in the world and therefore GHEFA
should continue to use Moody’s as their credit rating agency. Additionally, the A1 rating
assigned to GHEFA’s bond by Moody’s is about as high of a rating as GHEFA can reasonably
RUNNING HEAD: GHEFA BOND REFUNDING
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expect from any agency considering the fact that GHEFA is not a large corporation and only
large corporations are capable of receiving ‘AAA’ ratings.
It is highly advisable to implement a new marketing strategy to increase private interest
in the bonds. Advertising the bonds as an “investment in the future and the community” has
been proven to increase private interest in the past. Although Social Impact Bonds are a
relatively new concept, they have proven themselves to be a trustworthy strategy and GHEFA
should advertise their bonds as not only a financial investment, but also an investment in the
community. San Antonio school systems have used this strategy in the past and it was very
successful.
If the bonds are marketed correctly private investing could be the key to successfully
refunding the 2008 bonds which will be maturing this year. Currently, GHEFA is planning to use
the proceeds from 2015’s bond sales to refund the bonds and the interest earned to investors who
purchased these bonds in 2008. The risk presented is if GHEFA is unable to sell a sufficient
amount of 2015 bonds to refund those that are purchased in 2008. Therefore, a sound marketing
strategy is a key element of GHEFA’s plan. However, our team currently predicts that proceeds
from 2015 sales will be sufficient to refund these bonds.
Our team predicts that GHEFA will be able to raise enough funding using social impact
bonds by following these three steps as well as implementing a new marketing strategy as our
team recommended. There may be problems caused by GHEFA trying to avoid a downgrade to
its credit rating, but the internal control managers will analyze the decisions of the analysts and
prevent them from making any fraudulent or illegal decisions relating to the performance of the
social impact bonds. As a result, GHEFA can ensure that it will raise funds for higher education
RUNNING HEAD: GHEFA BOND REFUNDING
by preventing any risks to its credit rating while remaining ethical and transparent, and that
GHEFA will gain and keep the support of the public for this and future initiatives.
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