The Dormitory Authority of the State of New York approved the state's first qualified school construction bond deal at its monthly board meeting yesterday.
DASNY plans to sell $192 million of taxable fixed-rate QSCBs on New York's personal income tax credit under the new tax-credit bond program created this year as part of the American Recovery and Reinvestment Act.
The bonds are expected to price in early October at roughly the same time as up to $400 million of PIT bonds, also approved yesterday, that will be used to finance capital projects at the City University of New York. The CUNY bonds may be sold as taxable Build America Bonds. The QSCB proceeds will be used to fund grants to local school districts through the state's Expanding Our Children's Education and Learning program.
Goldman, Sachs & Co. will lead manage the deals. Harris Beach PLLC is bond counsel.
The QSCB deal will be the largest to date in the program that gives investors a federal tax credit instead of interest.
In theory, this allows the borrower to achieve a zero cost of interest, but the market for QSCBs is still being created, which has made it more difficult for issuers to find buyers. When the Oakland Unified School District went to market with $26.3 million of QSCBs in July, it offered a 2.8% supplemental yield in addition to the tax credits to attract a buyer.
To prevent the possibility of needing to add supplemental yield, DASNY yesterday authorized the QSCBs to be sold at a steeper discount than is usually permitted. Generally, authority would set a 90% minimum price, but for this deal, that minimum could be set as low as 80%.
"Goldman Sachs has advised that the market is relatively small for tax-credit bonds, and pricing is very sensitive and in order to avoid the need for having a supplemental current interest payment on the bonds, they've advised the Dormitory Authority that they may need to discount the bonds below 90%," said Doron Bar-Levav, an attorney at Harris Beach.
The QSCBs are expected to have a bullet 16-year maturity and are not subject to optional redemption.
The QSCBs will also have an additional feature to protect the investor in the unforeseen event that the bonds lose their tax-exempt purpose, which would cancel the tax credit. The bonds can be converted to current interest bonds which would replace the tax-credit with interest payments.
DASNY could also convert the QSCBs to current interest bonds if it wanted to legally defease the bonds before their maturity date, Bar-Levav said.
