WASHINGTON — The University of Virginia, one of the first issuers to plunge into Build America Bonds, returns to the market with a $190 million competitive deal scheduled for Wednesday.
UVA and the University of Minnesota were the first to sell BABs on April 15, 2009 — about two months after the taxable securities were created by the American Recovery and Reinvestment Act. Since then, issuers have priced $120 billion of BABs, opening state and local government debt to new buyers here and overseas.
Lately though, BAB spreads over comparable Treasury securities have increased as issuers are looking to do deals before the BAB program expires at the end of the year, some market participants said. Congress’ inability to pass legislation that would extend the program, despite support from the Obama administration, has caused large BAB deals to have trouble achieving the same interest rate savings for issuers that they saw earlier this year and last year.
Proceeds from the UVA deal will be used to finance new dormitories, as well as expansions to the college of arts and sciences and the university’s hospital. The bonds, which are rated triple-A by Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings, have a final maturity in 2040.
McGuireWoods LLP is the bond counsel and Prager, Sealy & Co. is providing financial advice.
The university’s credit could face future challenges because 43% of its total revenue comes from patient care activities, Moody’s said. Any uncertainty over state funding for Medicaid could pressure the ratings, according to the rating agency. The university also is financing an ambitious capital improvement plan over the next several years that is expected to include an additional $160 million of new debt by the end of fiscal 2012.
A week after the UVA and the University of Minnesota sold BABs last April, investors lost their skepticism as California priced $6.85 billion and the New Jersey Turnpike Authority priced $1.38 billion.
Sources said UVA’s current offering is likely to achieve greater interest rate savings than its initial deal.
When UVA issued BABs last April, the bonds yielded 255 basis points more than the 30-year Treasury bond, according to Thomson Reuters.
Those bonds, which have a 2039 maturity and were issued with a 6.2% interest rate, traded most recently on July 12 at a yield of 5.27%, according to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system.
Officials from the university declined to comment on the upcoming deal.
But Jonathan W. Nordstrom, the manager of Morgan Keegan & Co.’s municipal department in New York, said he expects UVA’s new BABs will have a 100 to 120 basis point spread over the comparable Treasury bond.
“Efficiencies have skyrocketed” since the inaugural UVA deal, Nordstrom said. BAB deals get “substantially more” interest now that taxable investors have grown comfortable with municipal debt, he said.
The comfort level has improved to the point that now some BAB deals are coming to market in serial, as opposed to bullet, maturities, Nordstrom said. The serialized structure helps some issuers lower their overall interest rate cost, he said. “Serials are more accepted in the market, more sellable in the market, than they were a year ago,” he said.
However, the spread between BABs and comparable Treasury securities has increased to 242 basis points, up 75 basis points over the past 10 weeks, according to the Wells Fargo index that tracks BABs. The index has reached the highest spread since it debuted last August.
A muni trader in Virginia who did not want to be identified said higher spreads should not affect the UVA deal. The triple-A credit with strong name recognition should be “aggressively bid,” he said. The widening BAB spread is likely the result of issuers looking to price BABs ahead of the program’s expiration at the end of the year.
