Spotlight on Wayzata Public Schools
By Matthew Hammer, Senior Municipal Advisor
and Beth Downes, Municipal Advisor
Debt service savings are not driven solely by falling interest rates. Ehlers continually reviews market conditions and outstanding debt structures to identify opportunities that can produce savings in all interest rate environments.
Whether a refunding creates value depends on the full economics of the transaction, not just headline interest rates. Higher market yields can reduce the price of outstanding bonds and create opportunities to repurchase debt at a discount to face value. In a traditional refunding, the bonds being refinanced are called, or “repurchased,” from investors at face value.
These pricing dynamics can become especially meaningful on larger bond issues, where even modest shifts can translate into substantial savings.
In this case, the analysis showed the potential for more than 5% present value savings, making the strategy worth serious consideration.
Wayzata Public Schools issued its taxable Series 2021A advance refunding bonds at a time when taxable rates were favorable. Today, however, a different market environment, combined with the coupon structure of those prior bonds, created a new opportunity to generate savings through a voluntary tender offer to bondholders.
Wayzata Public Schools Explores Tender Offer Refunding to Capture Debt Service Savings
Wayzata Public Schools had more than its historic school bond referendum underway this past spring. Executive Director of Finance and Operations Trevor Peterson, D.A. Davidson & Co., and Ehlers presented the Board with a voluntary tender offer strategy designed to generate millions of dollars in debt service savings by taking advantage of current market conditions. While coordinated alongside the election, the strategy carried some uncertainty because bondholder participation was voluntary and could not be guaranteed in advance.
A tender offer refunding occurs when an issuer offers to purchase its own bonds back from bondholders in the secondary market. The district repurchases those bonds “tendered” by the existing bondholders accepting the offer and cancels them from its outstanding debt obligations. The repurchase cost of bonds tendered can be financed with new refunding bonds, while bonds not tendered remain outstanding and continue to be paid according to existing terms. From a tax perspective, this structure is treated as a current refunding, distinguishing it from advance refundings that are now largely required to be issued as taxable obligations.
Background: The 2021A Refunding Bonds
In 2021, Wayzata Public Schools advance refunded its Series 2014A and 2014B bonds through the issuance of $132.9 million in Taxable General Obligation School Building and Alternative Facilities Refunding Bonds. Even though 2021 bonds were taxable, the refunding produced savings at the time but were not callable until February 1, 2029. Only the maturities from 2030 through 2036 were subject to call and prior redemption at face value, and those callable maturities carried relatively low interest rates, ranging from approximately 1.65% to 2.30%.
The Process
Under the proposed strategy, the District launched a formal voluntary tender offer directed at the 2021A bondholders. Bondholders had the option to sell their bonds back to the District at a specified price on a specific date. Once responses were received by the stated deadline, the District could identify which maturities and total amount of the outstanding bonds could be repurchased through the tender offer.
To fund the purchase of the tendered bonds, Wayzata issued new, tax‑exempt general obligation bonds. The debt service on the new bonds replaced the debt service previously associated with the tendered taxable bonds, while retaining the original call date of February 1, 2029, on the remaining callable maturities of the 2021A Bonds. Preserving the call date ensured the District maintained the flexibility to pursue a traditional refunding if interest rates became favorable in the future.
Why Savings Are Possible
Several factors contributed to the potential cost savings from the voluntary tender offer. First, changes in interest rates since 2021 affected market pricing of these low-coupon taxable bonds, allowing the outstanding maturities to be repurchased at a discount to face value. This reduced the amount needed to redeem the tendered bonds well below their face value, which similarly reduced the amount of bonds that needed to be issued to affect the tender. Second, the new refunding bonds were issued at tax‑exempt interest rates which helped lower the overall debt service costs.
However, the level of savings was highly dependent on the level of bondholder participation and how the participation was distributed across the maturity and coupon schedule. Not all bondholders accepted the tender offer, and participation varied by maturity, directly influencing how much debt could be refunded and at what cost to the district.
Prior to the formal tender offer, participation assumptions showed a range of outcomes. At 20% uniform participation across maturities, net present value savings were estimated at about $1.1 million. At 30% uniform participation, net present value savings could increase to approximately $1.9 million.
Estimated Impact for Wayzata
Ultimately the district received 38.15% participation by bondholders amounting to $40.01 million of principal. The combination of the net savings the District achieved by repurchasing the tendered bonds with the issuance of new tax-exempt debt resulted in future debt service savings of $3.08 million.
Other Considerations
As with any financial undertaking, actual results depend on several variables, including market interest rates at the time of pricing, the distribution of tendered bonds by maturity, and the final level of investor participation, none of which could have been known in advance. The District was also aware that it would incur certain upfront costs, such as fees for rating agency review and an information agent that provides details with respect to existing bondholders that are otherwise anonymous to the issuer. The remainder of costs were largely contingent on successful execution of the various legs of the transaction.
Despite these uncertainties, the potential magnitude of the savings prompted Wayzata Public Schools a rare chance to reduce costs while preserving future flexibility.
Although the District did not directly tie this opportunity to its referendum communications, the strategy was indirectly connected to the broader financing plan because of the District’s debt structure.
The strategy also reflects the added value Ehlers brought to the District by identifying a complex, market-driven opportunity that might otherwise have gone unexplored.
Throughout the process, Ehlers worked closely with District leadership and the finance committee to explain the structure, evaluate the risks, and support informed decision-making.
That collaborative approach reflected both Wayzata Public Schools’ thoughtful leadership and Ehlers’ strategic guidance, underscoring the strength of the partnership and the District’s confidence in pursuing a creative opportunity to generate meaningful savings for taxpayers.
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