CHICAGO - The Michigan Municipal Bond Authority today will enter the market with a roughly $560 million deal, the bulk of which will refinance the authority's outstanding $500 million in auction-rate debt, with a small piece financing loans to school districts across the state.
The sale is the MMBA's second issue for the relatively new School Loan Revolving Fund. Starting last year, the state shifted the funding of school loans to revenue-backed debt issued by the authority. Previously, the loans were financed with borrowing backed by the state's general obligation pledge.
The authority's first sale under the revolving fund program - a $500 million transaction - priced last April using auction-rate mode. Proceeds from today's sale will largely be used to refund those securities, which have seen at least one auction fail amid ongoing turmoil in the floating-rate markets. The refunding bonds will eliminate all the authority's outstanding auction-rate debt.
The issue will sell in a structure that includes four series of variable-rate and term-rate bonds, all of which are taxable. Three of the series - two of $150 million and one of $100 million - consist of term-rate bonds, while a $160 million series will be remarketed weekly.
The MMBA retained largely the same financial team that it worked with on the 2007 sale. Merrill Lynch & Co. is the book-running senior manager on the transaction, though this year the authority brought in Bear, Stearns & Co., Fidelity Capital Markets Services and JPMorgan as co-managers.
Robert W. Baird & Co. is financial adviser on the deal, while Dickinson Wright PLLC and Miller, Canfield, Paddock and Stone PLC are co-bond counsel.
For this issue, the agencyy obtained four standby bond purchase agreements from Depfa Bank PLC for the bonds. The MMBA's auction-rate bonds carried insurance from MBIA InsuranceCorp.
About $60 million of the issue will be used to make loans to qualified school districts and to fund a reserve deposit.
Under a rare state constitutional mandate, Michigan must provide loans to local school districts to help them cover debt service on general obligation bonds previously "qualified" by the state treasurer. The state had traditionally funded those loans by issuing GOs with the proceeds going into a school bond loan fund. But lawmakers approved legislation in mid-2005 that created the revolving fund and shifted issuance responsibilities from the treasury to the MMBA. The move makes the school fund self-sustaining and eases the pressure of the fiscally struggling state's general fund.
The 2008 bonds are secured by loan repayments from the fund's borrowers as well as repayments from preexisting loans made by the state.
Fitch Ratingsassigned AA/F1-plus rating to the issue, with the short-term rating reflecting the liquidity support provided by Depfa. Moody's Investors Service rates the issue Aa2/VMIG-1.
"We think that the program has a very sound strcuture and they have loan monitoring controls that help sustain the rating," said Fitch analyst Adrienne Booker. "The excess loan repayments and required program reserves provide protection against temporary local repayment interruptions."
Among the program's credit risks is a potential mismatch between the interest rates on the new bonds and the interest rates on the loans made by the authority. While the bonds are being issued as variable-rate and term-rate bonds, the interest rate on the loans is linked to the state's GO bonds made under the previous school bond loan program. Booker said that structure, however, is "mitigated by a 1.2 times debt service coverage requirement and also a trustee-held interest clearing fund."
