DALLAS — Louisiana is taking $403.5 million of gasoline and fuel-tax bonds to market next week as tax-exempt debt, rather than Build America Bonds, in response to investor demand.

The schedule for the negotiated sale includes a retail period Tuesday, with institutional pricing Wednesday. Proceeds from the sale will complete financing for constitutionally mandated road and bridge projects now under construction.

The sale had been expected to include up to $235 million of taxable BABs, but the state’s financial adviser said officials recently decided that investors were eager for tax-exempt debt. Issuance of long-term tax-exempt bonds fell 20% in the first six months of this year to $136 billion from the same period of 2009.

“There is demand in the market from traditional tax-exempt buyers and not a lot of supply,” said Freda Johnson, president of Government Finance Associates. “We felt that tax-exempt rates were at a historical low and that was very, very attractive to the state.”

State Treasurer John Kennedy said the deal could be restructured rapidly if market conditions make BABs a more favorable option. BABs are taxable bonds and their rapid expansion the past year has created pent-up interest among investors seeking traditional tax-exempt issuance in the municipal market. Taxable issuance rose 157% to $66 billion in the first six months of this year, from the same period of 2009.

“I don’t want to rule anything out or anything in,” Kennedy said. “This is a changing market right now, so we are still discussing the structure.”

Johnson expects strong interest from both retail and institutional investors.

“We’re looking for very strong retail interest on Tuesday,” she said. “We have senior underwriters with particular strengths in both segments that complement each other, and a very solid group of co-managers.”

The issue includes maturities through 2045 and many institutional investors are seeking the longer terms, Johnson said.

The second-lien revenue bonds are rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s.

Goldman, Sachs & Co. is senior manager on the sale, with Citi as co-senior manager. Co-managers include Morgan Keegan & Co., Loop Capital Markets LLC, Stephens Inc., and Sterne, Agee & Leach Inc. Foley & Judell LLC is bond counsel.

The bonds will be the last tranche devoted to Louisiana’s Transportation Infrastructure Model for Economic Development program — approved by voters as a constitutional amendment in 1990.

The state has issued more than $3.3 billion of bonds for the $5.5 billion TIMED program, including $1.9 billion of outstanding first-lien bonds supported by a dedicated tax of four cents per gallon on gasoline and diesel fuel.

With next week’s sale, there will be $920 million of outstanding second-lien bonds supported by the four-cent tax but also drawing on revenue from the remaining 16 cents of the state fuels tax.

“We’ve closed out the senior-lien bonds,” Johnson said. “These junior-lien bonds will be the last bond sale for the TIMED program.”

Kennedy said the bonds will be attractive to investors.

“We think this is a very strong credit, and we think the market will agree,” he said. “This is a mature program, with 77% of the projects completed. It is constitutionally protected, with no requirements for legislative appropriations or executive action to service the debt.”

The 20-cent per-gallon tax on motor fuels currently generates $600 million a year for the Transportation Trust Fund.

Two projects in the New Orleans area on the TIMED list approved by voters remain incomplete and are in the environmental study phase. The Department of Transportation and Development said it will not determine a cost estimate for them until 2011, but does not expect to finance the work with additional bonds.

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