Schools to Reap Benefits as LAUSD, Maryland Ready Hefty Deals

Educational needs will pace the primary market this week as the Los Angeles Unified School District sells $1 billion of general obligation bonds to help pay for capital projects at city schools and Maryland will use a portion of the proceeds from its $375 million sale on educational projects. Those two deals will make up more than 23% of the week’s total issuance of $5.9 billion. The total represents a 33% decrease from last week’s new-issue supply of $7.3 billion. In the week’s largest transaction, LAUSD will sell $1 billion of GOs tomorrow, after first holding a retail order period today. The bonds will be both serial and term bonds, with maturities that will extend to 25 years, according to Joe Zeronian, the district’s interim chief financial officer. He said different coupons will be offered to retail and institutional investors, with the majority of them structured to be premium bonds. Goldman, Sachs & Co. and UBS Securities LLC are the co-senior managers for the issue. Standard & Poor’s last week affirmed a rating of AA-minus with a stable outlook for the district’s GOs. Moody’s Investors Service rates the bonds Aa3 with a stable outlook. Though the preliminary official statement says that only two ratings were requested, Fitch Ratings maintains an underlying A-plus on many of the district’s bonds. Additionally, LAUSD will pay for triple-A insurance to enhance the ratings. Tamalpais Advisors Inc. is financial adviser, while Hawkins Delafield & Wood LLP is bond counsel. Sidley Austin LLP is special tax counsel and disclosure counsel. The bonds will be new money for the district’s construction program, and used for construction of 155 new schools and the renovation and rehabilitation of many more. Each year, the system approves a strategic plan that outlines the construction goals and capital projects that it will fund with bond issues in the coming year. Currently, 708,000 students receive their education in LAUSD facilities. “Attached to that plan is a budget which, in frequent consultation with the people in facilities, dictates what amount, if any, is needed,” Zeronian said. The money will be used “almost exclusively and in consistency with the bond measure authorizations. In some cases it’s library books or IT projects, but most of it goes for the acquisition of property and capital improvements.” The school district last came to market with GO debt in February 2007, when Lehman Brothers priced $524.9 million in two series. Bonds in the larger series, worth $500 million, mature in 2008 through 2027, with a term bond in 2031. Yields range from 3.55% with a 4% coupon in 2008 to 4.42% with a 4.5% coupon in 2031. Ambac Assurance Corp. insured all of the bonds except those maturing in 2008 and 2009, which were uninsured. Bonds in the smaller series, $24.9 million of refunding debt, mature in 2007, 2018, and 2019. Yields range from 3.50% with a 4% coupon in 2007 to 3.95% with a 5% coupon in 2019. Ambac insures these bonds as well, except for those that matured July 1, which were uninsured. All bonds are callable at par in 2017. Among 5% coupon paper in the deal, bonds maturing in 2011 were tightest to that day’s Municipal Market Data triple-A yield curve, with yields three basis points over the curve. Bonds maturing in 2015 were widest to the scale, with yields 12 basis points over. Zeronian said he expects this week’s sale will go as well as the last. “We’re hopeful,” he said. “We have been pleased in the past and we’re hoping that the market and the buyers will receive us as they have in the past.” In the week’s next-largest deal, the New Jersey Economic Development Authority tomorrow will sell $423.5 million of motor vehicle surcharges revenue bonds. The bonds will be issued in four series, including $269.2 million of tax-exempt revenue refunding bonds, $12.7 million of tax-exempt capital appreciation bonds, $42.4 million of federally taxable capital appreciation bonds, and $99.1 million of federally taxable current interest bonds. Bonds will be both serials and term bonds. Morgan Stanley and UBS Securities LLC will price the deal as co-senior managers. McManimon & Scotland LLC will act as bond cousel. Rogut McCarthy Troy LLC is underwriter’s counsel. All bonds but the refunding series will go to fund New Jersey’s special needs housing program.This will be the third time the state has leveraged vehicle surcharges and fees for driving violations. In 2004, the authority came to market with $807.5 million of motor vehicle surcharge-backed bonds, and in 2005 the NJEDA sold another $51.3 million. Moody’s rates the motor vehicle surcharge revenue bonds Baa1. On Friday, Standard & Poor’s released an A rating for the debt. XL Capital Assurance Inc. and Ambac will insure various portions of the deal. In other activity, Maryland will competitively sell $375 million of GOs on Wednesday for various projects, including education. The bonds are slated to mature from 2010 through 2022. According to Patty Konrad, the state’s director of debt management, the bonds will fund various projects outlined in a 2007 authorization bill. The legislation will allow the state to issue additional debt over the next few years to fund the projects. “There was a very long authorization bill that was done in 2007, and we’ll be issuing in the next few years to fund all these projects,” Konrad said. “The bonds are used primarily for education but in addition to that they are used for health and hospitals, public safety, the environment. The way Maryland works is that it’s all about cash flow, so [the funds are used] as needed for the project. We have a number of projects that are under construction now.”Public Resources Advisory Group will act as financial adviser. Kutak Rock LLP is bond counsel. Rated triple-A by all three rating agencies, Maryland will not use any insurance. Konrad expects a positive market response. “I think we are seeing a concern about quality in the markets right now,” Konrad said. “Maryland certainly has a high-quality bond and has been recognized as a high-quality bond by the rating agencies as well as investors.” The week will also see a number of deals involving short-term notes, including $713.1 million of revenue notes issued by the Michigan Municipal Bond Authority.