LAUSD Sets $950M, Largest Calif. Deal So Far in ’09

SAN FRANCISCO — The Los Angeles Unified School District hopes to bring almost $1 billion of general obligation bonds to market this week in the biggest California deal of the new year.

The deal — rated Aa3 by Moody’s Investors Service and AA-minus by Fitch Ratings and Standard & Poor’s — will set a new benchmark in a market that has seen few big deals since the bankruptcy of Lehman Brothers Holdings Inc. last September.

The district is prepared to sell as much as $950 million if it finds buyers. The full amount would make this the biggest California deal this year and the second-largest in the nation after a $1.1 billion Empire State Development Corp. sale on Jan. 9. It would be the largest municipal bond sale from an issuer in the state since June 2008, when California sold $1.5 billion of GOs.

“The district had initially contemplated issuing last fall, but with the severe market turmoil back then, the district put it on hold and has been waiting for a time when they can get into the market [at] reasonable” rates, said Jean Marie Buckley, LAUSD’s financial adviser and president of Tamalpais Advisors Inc. in Sausalito, Calif. “We’re ready to go any time, but we are evaluating it on a day-to-day basis.”

As of yesterday, the district was considering holding a retail order period today, with institutional pricing tomorrow.

The muni market rally of late December and January has lured issuers with pressing capital needs and strong credit ratings back to the market. Issuance rose 5.3% last month compared to January 2008.

The nation’s second-biggest school district needs to issue to speed one of the nation’s biggest capital improvement programs. It aims to complete the first phase of its $20.5 billion capital improvement program by 2011-2012. Voters in November approved a $7 billion GO bond issue that will fund the next phase of the capital program.

The construction schedule requires the district to come to market with sizeable deals about twice a year, Buckley said. Barclays Capital is senior manager for the deal, and Morgan Stanley is co-senior manager. Three California firms — De La Rosa & Co., Stone & Youngberg LLC, and Backstrom McCarley Berry & Co. — are also members of the syndicate.

The district has had to time the bond sale around both the general market and negotiations over the state’s two-year, $41.6 billion budget gap. Until California comes up with a balanced budget, the school district faces uncertainty about its operating budget that could put upward pressure on yields.

While the school bonds are backed by voter-approved property taxes, rating agencies and investors also want to see that the district’s operating budget is secure.

Lawmakers in Sacramento have been dropping hints that they are close to a budget deal for the last week, and the economic stimulus plan that is being revised by the U.S. Senate is expected to include substantial relief for schools.

LAUSD is also working to address likely revenue shortfalls by cutting $400 million from its current fiscal 2009 budget and $700 million from next year’s budget. 

 

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