BRADENTON, Fla. - The Fayette County, Ky., School District Finance Corp. competitively priced $41.15 million of taxable Build America Bonds on Tuesday, the first BABs from the Bluegrass State.

The bonds, with maturities out to 20 years, sold with a gross net interest cost of 5.19% to Morgan Keegan & Co.

Morgan Keegan was the only bidder, though five firms initially showed interest in participating in the sale.

After calculating the federal government's 35% subsidy on the bonds, the transaction provided a net interest cost of 3.38% to the school district, said Greg Phillips, a senior vice president at J.J.B. Hilliard, W.L. Lyons LLC, the school district's financial adviser.

"It's just an incredible rate for a 20-year financing," Phillips said.

The district had hoped to achieve a net interest cost lower than 4%, he said, but the final calculation of 3.38% "was just astounding."

Proceeds of the bonds will be used for reconstruction and renovation projects at three elementary schools and two middle schools in the district, which is coterminous with Lexington Fayette Urban County Government.

The bonds received ratings of Aa3 from Moody's Investors Service and AA from Standard & Poor's.

Though the school district's finance team had been working on the offering since late last year, Phillips said the team started considering a BAB structure about a month ago.

Then the spreads to taxables for BABs dropped dramatically from the time when the first BABs came to market in April, he said.

The deal, under Kentucky law, had to be sold competitively, so it was structured two ways.

Bids could be submitted for the entire amount as all BABs, or bids could be submitted with $30 million of bank-qualified tax-exempt bonds and $11.15 million as BABs.

"We knew the all-BABs option might be the winning structure, but it only became apparent to us a week or 10 days ago," Phillips said.

"We wanted to let the market decide which was the better way to do it, and the evidence was pretty clear," he said. "As it turned out, we did not even receive any tax-exempt bids, due to the fact that everyone thought BABs was going to be a much better deal."

Phillips said the transaction was also the first BAB deal for Hilliard Lyons and will be reviewed to determine if it can be used as a model by other issuers, particularly other Kentucky school districts that typically sell bonds in much smaller amounts.

"One of the questions we need to deal with is if similar pricing could be obtained on smaller transactions," he said. "If the Fayette pricing is any indication about what other districts could get, I think it could become very popular."

Stoll Keenon Ogden PLLC was bond counsel.

Closing on the Fayette bond deal is scheduled for June 16.

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