BRADENTON, Fla. - The Kentucky State Property and Buildings Commission today expects to complete a two-day pricing of $388.1 million of new and refunding lease revenue bonds, including $210 million of federally taxable Build America Bonds.

The KSPBC deal offers something for all investors - from traditional tax-exempt and taxable debt to BABs, said a source familiar with the offering.

The deal is expected to be structured with $131 million of Series A tax-exempt refunding bonds, $46 million of Series B taxable refunding bonds, and $210.2 million of BABs designated as Series C. The preliminary official statement also indicates that an undetermined amount of tax-exempt Series D bonds may also be offered.

While the Series A and B bonds will refund previously issued debt, proceeds of the Series C new-money BABs will finance various capital projects, including those for education, infrastructure, economic development, and other facilities and programs.

According to rating agency reviews of the transaction, maturities of the refunding bonds will be extended for budget relief and debt service savings, while the state intends to use the subsidy payment from the federal government for the BABs in the state general revenue fund instead of for debt service.

Tom Howard, the executive director of the Office of Financial Management, could not be reached for more details about the offering.

The book-runner, Morgan Stanley, began the sale yesterday with retail pricing. It concludes today with institutional pricing.

Fitch Ratings rated the bonds AA-minus, Moody's Investors Service rated them Aa3, and Standard & Poor's rated them A-plus. Both Fitch and Moody's have negative outlooks on Kentucky and the bonds, largely because of recession-related budget problems.

Standard & Poor's yesterday revised to stable from positive its outlook on Kentucky's AA-minus issuer credit rating, and the A-plus rating on the KSPBC's debt.

"The outlook revision reflects the impact of a challenging revenue climate on Kentucky's budget and reserves," said a statement by Standard & Poor's analyst Helen Samuelson. "The pressure on revenue is also hindering meaningful progress in reducing pension and retiree health care unfunded liabilities."

The stable outlook recognizes the commonwealth's demonstrated willingness to make budget cuts and enhance revenues to narrow the funding gap, Samuelson noted.

Pension funding also was a concern of other analysts. Moody's said the funded levels of retirement systems are 68% for the Kentucky Teachers' Retirement System and 55% for the Kentucky Employee's Retirement System. The commonwealth's liability for other post-employment benefits has been estimated at about $12 billion, Moody's said.

The General Assembly currently is in special session trying to close a projected $1 billion funding gap in the 2010 budget, which goes into effect July 1.

Other underwriters on this week's sale are Citi, Edward D. Jones & Co., First Kentucky Securities Corp., J.J.B. Hilliard, W.L. Lyons LLC, JPMorgan, Merrill Lynch & Co., Morgan Keegan & Co., PNC Capital Markets LLC, Ross, Sinclaire & Associates LLC, Sterne, Agee & Leach Inc., Stifel Nicolaus & Co., and Wachovia Bank NA.

Kutak Rock LLP is bond counsel. Frost Brown Todd LLC is underwriters' counsel.

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