Regional News

San Diego USD Plans QSCB Deal

SAN FRANCISCO - The San Diego Unified School District next week plans to sell the first of the qualified school construction bonds authorized under the federal stimulus package. It expects to pay no interest on the debt.

The district will sell $38.8 million of so-called QSCBs as part of a $170 million general obligation bond issue. The school district will make no coupon payments on the taxable QSCBs and plans to sell them at par. Instead of interest payments, investors will collect tax credits from the federal government.

"This is a significant subsidy for the issuer," said Marvin Markus, a managing director at Goldman, Sachs & Co., which is lead underwriter on the deal.

The American Recovery and Reinvestment Act authorized $22 billion of qualified school construction bonds, supplemented by federal tax credits. The school bonds carry a much larger interest subsidy than the Build America Bonds program, but school districts do not have the option of collecting the subsidy directly.

The stimulus bill lays out the specific educational investments that the bonds may finance, and it sets a series of conditions that aim to ensure the money is used quickly to stimulate the economy. The legislation allows the bonds be issued in 2009 and 2010 and requires that proceeds be used within three years. It also sets the maximum maturity for the debt at 14 years.

"With traditional financing, we were only going to be able to do about $150 million, but now, with the stimulus money from the feds, we're going to be able to do about $170 million," said James Masias, chief financial officer at the school district. "We've got about $40 million that we're spending in technology, so we're going to be able to push up our technology investment."

The school district was able to quickly take advantage of the new program because it had an existing school capital improvement program and voter bond authorization in place, according to bond counsel Mary Collins of Orrick, Herrington & Sutcliffe LLP in San Francisco.

The stimulus legislation split the authorization between the states and the nation's 100 largest school districts. The Treasury allocated San Diego's $38.8 million authorization on April 3, and the district had a POS prepared and waiting for the authorization.

The three-year window to use the bond proceeds required the district to include extraordinary mandatory redemption features in the preliminary official statement, according to Collins. "If they don't spend all of the money within three years, they are required to use the unspent proceeds to redeem the bonds," she said.

But with a $2.1 billion capital plan in progress, the district has no intention of losing any of the interest-free capital. The district is issuing the tax-credit bonds with a single bullet maturity in 2023 and the tax-exempt bonds as capital appreciation bonds maturing over 25 years.

"What was energizing and exciting about this is that we are doing just what the stimulus package intended to do," Collins said. "We are issuing bonds and building things, and we're going to build these projects in the next 18 months."

She said preparing the official statement was much more complex than a normal tax-exempt school bond deal because of the deal's tax status.

The tax credits themselves are taxable and available to investors to use quarterly. The Treasury sets the tax credit rate based on market interest rates for other similar credits. The rate would have been 7.75% if the San Diego bonds sold last week.

The school district is rated AA by Standard & Poor's and Aa2 by Moody's Investors Service.

The tax status also means a different set of buyers for the bonds.

"We will be talking to the universe of taxable buyers, both people who traditionally buy investment-grade corporate debt, investment-grade sovereign debt, and people who buy municipals who understand the credit," Markus said. "We have all our sales forces out discussing with investors the desirability of this kind of bond."

Goldman is lead underwriter and Stone & Youngberg LLC is co-senior manager. Citi, De La Rosa & Co., and Loop Capital Markets are co-managers. Gardner, Underwood & Bacon LLC is the financial adviser.

Markus said the deal is structured to allow investors to strip the principal and tax-credit portions of the bonds to be sold separately.

"We provide the option of investors owning the whole bond or owning pieces," including the principal strip, the tax credit strip, or portions of the tax credit strip, he said. "Some might want just the principal and some might want just the tax credit, so we've provided full flexibility, a menu of approaches to marketing and ownership."



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