Sunday, October 11, 2009


By Jeremy R. Cooke |

Oct. 1 (Bloomberg) -- The Los Angeles Unified School District raised almost $1.7 billion today to fund work on its facilities, selling the third-largest Build America Bond issue and the largest Qualified School Construction Bond under taxable borrowing programs created by this year’s economic stimulus.

Los Angeles Unified, the second-largest U.S. public school system after New York City, sold $1.37 billion of Build America Bonds due in 20 and 25 years at 1.7 percentage points more than comparable-maturity U.S. Treasuries. The federal government pays 35 percent of the taxable interest cost.

The Southern California district also sold $318.8 million of Qualified School Construction Bonds, almost doubling the amount of debt outstanding under the program. Investors will get a 5.96 percent federal tax credit and a 1.54 percent taxable coupon interest rate, making it a lower cost loan for the district, according to data compiled by Bloomberg.

“As schools know well the enormous benefit within this structure, we find it likely that the investment community will step on board as the QSCB market likely grows into a multibillion market over the next 15 months,” Justin Hoogendoorn, the Chicago-based chief investment strategist at BMO Capital Markets, said in a note to clients this week.

School districts across the country have been allocated $22 billion in qualified borrowing capacity for school construction through the end of 2010. State and local governments have sold at least $36.9 billion of Build America Bonds so far and can sell an unlimited amount more through Dec. 31, 2010.

Largest Sales

The largest Build America Bond issues came in April, when California sold $5.23 billion and the New Jersey Turnpike Authority issued $1.38 billion.

The Los Angeles school system sold $1.03 billion of 5.75 percent bonds due in 2034 and $340 million of 5.76 percent debt due in 20 years, both priced to yield 5.674 percent.

The district’s general obligation borrowing was approved by voters and will be backed by property taxes levied on a tax base whose 2010 assessed valuation of $474 billion was little changed from the previous year, according to Moody’s Investors Service.

“The vast majority of the proceeds will be used to fund the district’s large capital program, which includes renovations and upgrades to all facilities of the district and the addition of about 167,000 new spaces for students,” Kevork Khrimian and Eric Hoffmann, analysts for New York-based Moody’s, said in a ratings report earlier this week.

Moody’s assigns its fourth-highest of 10 investment-grade ratings, Aa3, to the Los Angeles school bonds. Standard & Poor’s rates them an equivalent AA-. Underwriters led by Citigroup Inc. and Goldman Sachs Group Inc. handled the Los Angeles deal.

Quarterly Performance

The district also planned to sell about $181 million of tax-exempt bonds today to refinance debt. Final pricing details weren’t available.

Megan Reilly, chief financial officer, didn’t immediately reply to a request for comment.

State and local government bonds completed their best quarterly performance on record yesterday, rising 8 percent since the end of June, according to the Municipal Master Index. Merrill Lynch & Co., now owned by Bank of America Corp., started compiling the total-return gauge in 1989.

Yields on top-rated general obligation bonds due in 10 years slid one basis point, or 0.01 percentage point, to 2.95 percent today on a daily Municipal Market Advisors index, the lowest since at least 2001.

No comments: