The Dormitory Authority of the State of New York goes to market today with the state’s first qualified school construction bond deal. DASNY is marketing at least $50 million of QSCBs while at the same time offering $250 million of Build America Bonds and $99.8 million of tax-exempt bonds all on the state’s personal income tax credit.
But investors who want to get in on the QSCB deal may find it’s too late: Guggenheim Partners LLC wants them all.
“We’ve given the underwriter an order for the entire issue,” said Guggenheim chief investment officer Scott Minerd. “It’s a fantastic credit.”
Standard & Poor’s rates the state’s PIT credit AAA and Fitch Ratings rates it AA-minus.
The Chicago-based investment management firm has been the biggest player in the burgeoning QSCB market. Minerd said the firm to date has purchased $425 million of the securities, not including the DASNY deal. Issuers have sold $899.3 million of the bonds since the first deal priced in April, according to Thomson Reuters.
The QSCB program was created under the American Recovery and Reinvestment Act to offer issuers a cheap financing tool for school construction. Investors receive a federal tax credit in lieu of interest that saves borrowers money, but some issuers have included supplementary interest coupons on their deals to make them more attractive. The tax-credit rate is set by the U.S. Treasury on the day of the securities’ sale.
“We do not anticipate that the QSCBs can be placed at par in the current market,” state Division of Budget spokesman Matthew Anderson said in an e-mail. “As a result, we expect that a supplemental interest payment or discount will be necessary to sell the bonds.”
Minerd said that they expected the bonds to have a supplementary interest coupon but that the rate had not been set.
“Virtually every deal that I’ve seen in the last month or two had to come with a supplementary coupon,” he said. “The market clearing rate has actually been higher than the tax credit has been for quite a period now.”
Goldman, Sachs & Co. is underwriter on the QSCBs that will mature in 2025, according to the preliminary official statement. Harris Beach PLLC is bond counsel.
The Dorm Authority’s QSCBs have an additional feature to protect the investor in the unforeseen event that they lost their status as qualified school construction bonds, which would cancel the tax credit. The bonds can be converted to current interest bonds that would replace the tax-credit with interest payments, a feature that Minerd said enhanced the deal’s attractiveness.
The QSCB market got off to a slow start but it’s picking up steam. With the exception of May when no such bonds were sold, volume has increased every month and $370.4 million have been sold since the beginning of October. The tax credits can be separated from the bonds’ principal payments, but Treasury has not yet provided guidance on stripping the credits.
The state is using the QSCBs to fund a portion of its Expanding Our Children’s Education and Learning program which gives grants to local school districts. The program was created in 2006 and allocated $2.6 billion of grants to school districts.
The State Education Department has certified that $64 million of capital projects currently are eligible for EXCEL grants. The current bond offering could be increased today to match that amount, Anderson said. Most of the EXCEL grants, including all to New York City, have been used already but $467 million are still available to school districts.
State officials expect to offer more QSCBs as more projects are certified, Anderson said. Certification can take time because projects often require voter approval and have to be approved by the state, according to Carl Thurnau, director of facilities planning for the education department.
The federal government allocated New York was allocated $192 million of QSCBs in 2009 out of $11 billion nationally. New York City, Buffalo and Rochester received separate allocations.