Anatomy of a deal: Los Angeles Unified's Far West winner

LAUSD

After more than a decade of cuts to the promised subsidy that underpinned Build America Bonds, dozens of issuers pulled the plug on that structure this year.

The Los Angeles Unified School District was in the forefront, with the $2.9 billion deal that won the Far West category of The Bond Buyer's Deal of the Year awards.

The refunding of LAUSD's 2009 and 2010 BABs became feasible in 2024 as bond counsels nationally began to reconsider the extraordinary redemption provisions associated with federal direct subsidy bonds authorized under the American Recovery and Reinvestment Act of 2009.

The BAB program, which expired after 2010, allowed tax-exempt bond issuers to sell taxable bonds instead, and receive an interest subsidy from the federal government.

But sequestration through the federal budget process soon cut the promised subsidy.

LAUSD took advantage of the new legal playing field by refunding its $2.6 billion of BABs into tax-exempt bonds. The deal also current refunded for savings about $500 million of outstanding tax-exempts with a deal structure that generated more than $363 million of original issue premium.

The "groundbreaking $2.9 billion transaction was a key element in helping secure market access for future issuers looking to achieve savings and remove the risk of further reductions to their federal BABs subsidies," according to the Deal of the Year nominating statement.

BofA Securities led a 13-bank syndicate in pricing $2.97 billion in GO refunding bonds.

LAUSD started discussions with bond counsel on the BABs refunding in December 2023, and started working on it in January 2024, according to an LAUSD spokesperson who declined to be identified by name.

LAUSD achieved $138 million in net present value savings on the refunding, according to the spokesperson.

"The market conditions allowing for such a favorable refunding were expected to be temporal," according to the spokesperson. "Coupled with risks associated with sequestration, the district wanted to get everything taken care of while it was possible to do so."

LAUSD then "acted with tremendous speed to secure Board of Education approval" on Jan. 23, and post an EMMA notice of sale on Feb. 16, according to the nominating statement.

"The board was receptive to the opportunity," the spokesperson said.

The 2024 GO refunding bonds priced on April 2024 secured $8.7 billion of total orders from more than 125 unique retail and institutional investors, according to the nominating statement. 

"Importantly, and unlike BABs refundings that preceded LAUSD, there were no verbal, or written objections to the district's use of the extraordinary redemption provisions," according to the nominating statement.

The BAB refundings weren't always well received by investors who held the outstanding taxable paper. A University of California deal in March brought a written legal threat from investors, though that deal went ahead.

"The language in the extraordinary redemption provisions were clear and the district met the conditions," the LAUSD spokesperson said.

It does not appear there have been any significant investor objections to any one of the 25 BABs refundings that followed LAUSD, the deal's nominating statement said.

LAUSD

The district has shown that, if the extraordinary redemption provision conditions are met, and market conditions are favorable, "BABs can be potentially refunded to eliminate the cost/risk associated with sequestration, and potentially realize additional savings as well," the spokesperson said.

About $14.9 billion of BABs were called in 2024 while $938.3 million is set to be called, according to October data from J.P. Morgan. Year-to-date, 39 issuers have priced deals to refund their outstanding BABs, the data says.

Estimates earlier this year showed that up to $30 billion of outstanding BABs were candidates to be called back via an extraordinary redemption provision, which issuers began to use following a favorable court ruling that bond attorneys said cleared the way for such redemptions of sequestered bonds.

For over a decade, as the subsidy for direct-pay BABs "has been less than originally promised due to sequestration, issuers have wondered if sequestration constituted an 'extraordinary event' that would trigger their right to seek extraordinary optional redemption," Orrick, Herrington & Sutcliffe partners Charles C. Cardall and Barbara Jane League wrote in a piece originally published on the law firm's website.

The deal helped pave the way for dozens of additional BAB refundings that were completed in 2024 following the sale of LAUSD's refunding bonds, the nominating statement said.

The nomination pointed to several highlights of the deal:

It was the largest municipal bond financing complected during the Deal of the Year nominating period of Oct. 1, 2023, through Sept. 30, 2024.

It "refunded more BABs than any other transaction previously executed — next largest in 2024 was more than 50% smaller at $1.2 billion for the State of Washington," the nomination said.

LAUSD was also the only school district to refund BABs during that time frame and, according to the nominating statement, it was the first to refund voter-approved GOs utilizing the extraordinary redemption provisions of BABs.

Hawkins Delafield & Wood LLP was bond counsel, led by partner Diane Quan for this deal.

Orrick was disclosure counsel and Nixon Peabody LLP was underwriters' counsel. Public Resources Advisory Group was municipal advisor.

Douglas Baron, director of public finance investment banking in the Los Angeles Office of BofA Securities, declined to be interviewed for the article.