Louisiana State University's aborted bond sale last week underscored the increasing vulnerability of local deals to states' financial pressures.
LSU's almost $115 million bond offering had been pre-trading in the secondary market when investors withdrew from the deal after concerns emerged over LSU's financial status.
The University said it stopped the sale because of what it termed inaccurate media reports speculating that it was in the process of filing a "financial exigency plan." In a statement, however, LSU said it was exploring "a wide range of contingency plans," because the state of Louisiana is facing a $1.6 billion deficit.
Louisiana State Treasurer John Kennedy said he was told that some national investors had pulled out of a large part of the transaction "amid concerns over budget instability and state support for LSU and other Louisiana colleges and universities."
Kennedy said that Gov. Bobby Jindal's budget would cut higher education funding between $211 million and $700 million, much of which would have to be absorbed by LSU. He said investors had also read that Jindal threatened to veto the Legislature's entire state budget.
"The collapse of LSU's bond offering mirrors a trend we're seeing across the nation: state leaders are avoiding making tough budget decisions by pushing these decisions down to the local level," Matt Gardner, Executive Director Institute on Taxation and Economic Policy told The Bond Buyer. "When state lawmakers seek to balance their budgets by cutting aid to local governments, it's not a real solution -- it's just a shell game. And the losers from this shell game, inevitably, are local governments and those who depend on local government services."
LSU did nothing wrong in revealing publicly that it is preparing for another round of state budget cuts, Kennedy said.
A bond lawyer, who requested anonymity to comment on the cancellation, said that the bond documents appeared to contain good disclosure, and that the issuer probably made the correct decision, because trying to close a deal with rumors swirling about its financial situation could create a bad market for the bonds.
"It seems it's a lot better not to close," the lawyer said. "I'm not sure they could have solved this with additional disclosure."
LSU's difficulties are "not an anomaly," Gardner said. "This is simply a very high-profile example of the pressures facing local governments around the country."
In New Jersey, for example, the city of Trenton last week delayed an $18 million sale of general improvement and sewer utility refunding bonds that had been scheduled for April 28. The offering was postponed because the state of New Jersey's credit rating had recently been lowered.
Moody's Investors Service on April 16 downgraded the state's general obligation bond rating to A2 from A1, affecting about $32 billion of debt.
"Some local governments rely on state funding for a substantial piece of their annual operating budget," said Naomi Richman, Moody's Managing Director for Local Governments. "Budget challenges at the state level can put pressure on state aid flowing to local governments."
In the tumbledown effect, Moody's cut Trenton's $317 million of GO debt on April 20 to Baa1 from A3 due to the state downgrade. Moody's said its action reflected "the city's heavy reliance on state aid from New Jersey. The risk of cuts or delays in aid is increased with the state's fiscal pressures and rising pension liabilities."
Trenton's Finance Director Ronald Zilinski said that because of all the rating changes, the city would have had to have paid a higher interest rate on the competitive sale and thus would not have met a state-mandated minimum 3% savings rate.
He told The Bond Buyer that the city is now waiting for more favorable market conditions for the refunding and will come to market with the refinancing at that time.
"The economy is taking its own sweet time to get better," he said, "but it is getting better."
Trenton is still planning to do two other deals on schedule -- an $11 million new money bond sale set for May 28 and a bond anticipation note sale going up for bidding on June 3. Zilinski said, though, the city will now have to pay a higher interest rate when it sells these issues and it will cost more to insure them because of the state downgrade.
Trades in the LSU bonds were subsequently removed from the Municipal Securities Rulemaking Board's EMMA filing system. Ernesto Lanza, a shareholder at Greenberg Traurig in Washington, said deals aren't canceled this late in the process often, but that it does happen in extraordinary circumstances.
Lanza said it is relatively easy to pull back on a transaction before the bond purchase agreement is signed, generally a couple of days after pricing, because expressions of interest in the bonds do not constitute a binding contract between issuer and investor.
"The bond purchase agreement is the line where things get messy," Lanza said.
