Elite Prep Schools Flood Muni Market After Regional-Bank Tumult
1 / 2
Elite Prep Schools Flood Muni Market After Regional-Bank Tumult
Erin Hudson
7 min read
(Bloomberg) -- Just down the road from Stanford University, a roughly $200 million 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 center and a recording studio.
It’s a massive financial undertaking for 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 $60,000 a year in tuition.
Castilleja, an all-girls school that opened in 1907, wound up selling about $106 million 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 $803 million combined, almost double the previous year’s tally and the most since 2008, data compiled by Bloomberg show.
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 — 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. The school didn’t respond to phone and email requests for comment.
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 discussing private matters. The banks cultivated the relationships in part to win other business and bolster connections with board members and wealthy parents, according to people familiar with the matter.
“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 in Stifel Financial Corp.’s education and nonprofit-finance practice. The firm was an underwriter on 10 of these schools’ muni deals last year, data compiled by Bloomberg show.
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 $4 trillion municipal market is vying for their business — a half-point or more lower in some cases, say people with knowledge of the situation. And while it’s not exactly a panacea at a time of mounting economic pressure, cheaper financing is a welcome development for schools almost two years after the banking crisis threatened to shrink their options.
“The silver lining in the recent 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 managing director.
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 neighborhood 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.
Schools grew used to the “white-glove service” it provided, said Stifel’s Christoff. As of the first half of 2023, First Republic handled the banking for about 52% of California private schools that responded to a California Independent Schools Business Officers Association survey. Nationwide, it had about $4 billion of loans to private schools when JPMorgan Chase & Co. agreed to acquire it in May 2023, said people familiar with the situation. The school-lending unit remains active under JPMorgan, they said. A bank spokesperson declined to comment.
At Silicon Valley Bank, the nonprofit lending team led by Gisela LoPiano focused on building long-term relationships with schools and offering flexible loan terms, such as repaying with fundraising proceeds, she said.
First Citizens BancShares Inc. agreed to acquire SVB in March 2023. Her group, which began at wealth manager Boston Private two decades earlier, focuses on education, with more than 50% of its loans going to independent schools, according to LoPiano. She said she’s been gaining education-related clients and expects 2025 to be a strong year. The bank declined to comment on the amount of its loans to these schools.
New Calculus
Public deals were less appealing to some schools in past years because they were seen as more complicated, they took longer to complete and issuance fees were higher, people familiar with the matter say. Obtaining a credit rating and fulfilling reporting requirements to bondholders could also be arduous.
But the calculus changed after the 2023 banking tumult.
Some banks have become hesitant to offer longer-dated loans, according to people with knowledge of the matter, while muni bonds commonly have maturities as long as three decades. Most banks also require schools to shift accounts as a condition for getting a loan, which some schools have become more cautious about, the people said.
Most crucially, financing via munis is now typically cheaper. That’s partly because higher interest rates lifted deposit costs for banks, and also because strong investor demand for the still relatively rare bonds helps lower yields.
The securities offer different exposure than the public-school districts that can dominate certain state muni-bond funds, said Nathan Will, head of muni credit research at Vanguard Fixed Income Group.
“To get a name like Castilleja School in there is always going to diversify you,” he said.
In Connecticut, The Loomis Chaffee School found that banks couldn’t compete with rates on munis in late 2023 when it was borrowing for renovations, according to people familiar with the matter. It was a change from 2020, when it chose a loan from a local bank after aggressive bidding for the business, including from SVB and First Republic, the people said.
In late 2023, the “supply and demand dynamic was really favorable for borrowers” in the muni market, said school CFO Richard Esposito. The sense was that investors “would be hungry for good credit.”
Market Battle
Of course, banks are battling for market share.
Los Angeles-based City National, for example, said it’s working with a growing number of independent schools. And fellow California lender Five Star Bank hired First Republic veteran Jeff Winkel in the Bay Area last year, aiming to tap into the market.
Winkel said he spends his days talking to schools about their financings options, and he expects that Fed rate cuts will eventually help banks offer more competitive loans.
“There are many banks, large and small, that are interested in this business and there’s always plenty of competition on these deals,” said LoPiano at First Citizens Wealth.
Watching the market dynamics, Greenwich Country Day School in Connecticut paid to get a credit rating last year.
There was no major project in the pipeline or a big need for capital, said head of school Adam Rohdie. But having the rating “just gives us another arrow in the quiver.”
