Milan Area School District of Michigan to Sell $49M of BABs

CHICAGO - Michigan's Milan Area School District plans to enter the market early next week with nearly $49 million of taxable general obligation Build America Bonds.

The district, located about 15 miles south of Ann Arbor, decided within the last few weeks to issue BABs over traditional tax-exempt bonds in order to take advantage of the federal interest rate subsidy featured in the new program that will result in an estimated $7 million in interest savings depending on market conditions, said Diana Fleszar, the district's finance director.

The district opted to take the 35% direct interest subsidy instead of allowing buyers to take a 35% tax credit on interest paid - the other alternative offered under the program - as investors so far seem uninterested in the tax credit, members of the finance team said.

Milan is one of a growing number of issuers beginning to hit the market with taxable BABs. Interest has grown in the last few weeks following the Treasury Department's release of initial guidelines on the direct-pay subsidy and tax credit for buyers and other details. The program is part of the American Recovery and Reinvestment Act.

Raymond James & Co. is the underwriter on the transaction. Ann Arbor-based Stauder, Barch & Associates Inc. is the district's financial adviser, and Bloomfield Hills-based Thrun Law Firm PC is bond counsel.

The issuer plans to enter the market Monday or Tuesday with the 25-year bonds.

The school district, which last entered the market in 2002 with a refunding issue, had planned the borrowing since last spring, Fleszar said. Voters approved the borrowing in February.

"It was just recently after our bond proposal passed and we were getting our team together that Stauder Barch came up with the idea [to issue BABs]," Fleszar said. The main attraction for the district is the several million dollars the district expects to save, she added.

So far investor interest in the tax-credit alternative seems weak, said Paul Stauder, the district's financial adviser.

"If you have a market for bonds where you can sell the tax credit, then we would certainly go that way, but at this point that market doesn't appear to be readily available," he said. "There's not enough demand for the tax credit."

Like all issuers under the program, the district can offer the bonds as taxable BABs if the debt is financing qualified tax-exempt capital projects and is issued before Jan. 1, 2011. Depending on market response, the finance team may decide to offer part of the $49 million issue as traditional tax-exempt bonds, according to Stauder.

He said his firm is talking with several clients about the program. "We have the direction we need now and can move forward with this if it makes sense. I suspect we'll begin to see more of these," Stauder said.

The issue will be rated by Moody's Investors Service and Standard & Poor's, though neither had released ratings yesterday. The bonds may be rated under the state's triple-A rated school fund program.

Proceeds will finance renovation projects and energy upgrades as well as some equipment purchases across the district. The Milan district serves 2,532 students with two elementary schools and one middle and high school.

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