The Salk Institute for Biological Studies
Serving in the role of financial advisor1, Prager & Co., LLC recently (August 2014) concluded an engagement with the Salk Institute for Biological Studies (the "Institute"). Exploring questions about the basic principles of life, the Institute ("A1") is one of the world's most renowned, private, non-profit biomedical research institutions.
This engagement involved refunding the Institute's Series 2005 Bonds and funding $15MM for capital improvements. Prager facilitated the negotiation of a private placement wherein the Institute and lender agreed that the loan rate would be locked upon closing, but interest will not start accruing until such time that loan proceeds are drawn to pay the refunding bonds' interest (January 1, 2015) and remaining principal and interest (July 1, 2015)—and only then on the actual amounts drawn on each of those dates and not before. The interest rate of 3.40% is fixed for the loan.s term of thirty years. There was no forward-delivery premium and no fees for committed but undrawn loan proceeds. A liquidity covenant requiring expendable resources to debt of 0.33:1.00 was negotiated2.
Notably, this arrangement eliminated the significant negative arbitrage which otherwise would have resulted from funding a refunding escrow with securities earning almost 500 basis points less than the rate that the Institute is paying on its refunded Bonds. While the loan proceeds will be used to service the refunded Bonds' payments on 1/1/15 and 7/1/15, the new loan will not begin to amortize principal until 10/1/16 and remains in an interest-only mode until then.
1. As a financial advisor, Prager has a federal fiduciary duty to place our clients' needs ahead of our own and to provide competent and expert advice. Prager is registered with the SEC as an Independent Registered Municipal Advisor ("IRMA") and as such are authorized to serve in a fiduciary capacity.
2. We know of two highly-rated southern CA institutions which—while working without the benefit of a financial advisor—recently negotiated private funding arrangements containing financial covenants requiring an expendable resources-to-debt ratio of 1.00:1.00.