CHICAGO - The Michigan State Building Authority is expected to enter the market this week with $200 million of fixed-rate revenue bonds, part of which will refund floating-rate debt and eliminate the state's exposure to recently downgraded Depfa Bank Plc.

A key debt issuer in the state, the SBA has about $2.9 billion of outstanding debt, accounting for more than 40% of Michigan's total tax-supported debt.

Of the upcoming $200 million issue, $140 million will be new money used to finance a number of projects for colleges, universities, and state buildings. Another $46 million will be used to refund two series of three-year-old bonds that are supported by letters of credit from Depfa Bank, which all three rating agencies have downgraded since September amid the larger credit crunch.

The transaction comes about a week after the state refunded $368 million of variable-rate general obligation bonds that were backed by standby bond purchase agreements from Depfa. That transaction was expected to cut nearly in half the state's floating-rate debt.

The SBA's refunding transaction will further reduce the state's variable-rate debt, and will completely eliminate its exposure to Depfa, according to Moody's Investors Service analyst Ted Hampton. Of the $46.8 million, about 80% are now held by Depfa, Hampton wrote in a report on the upcoming issue.

Senior managers Morgan Stanley and Siebert Brandford Shank & Co. will lead a team of five additional firms: Citi, Fidelity Capital Market Services, Loop Capital Markets LLC, Merrill Lynch & Co., and Rice Financial Products. Dickinson Wright PLLC is bond counsel to the authority, and Robert W. Baird & Co. is its financial adviser.

Standard & Poor's rates the bonds A-plus with a stable outlook, while Fitch Ratings rates the debt A-plus with a negative outlook. Moody's rates the bonds A1 with a stable outlook.

The bonds are secured by lease-rental payments from the state, paid from annual appropriations. Under current law, the governor is required to include rental payments in budget requests and the Legislature is required to make the appropriation.

"Lease provisions are excellent; the leases' primary strength is a provision that contractually obligates Michigan to make rental payments for the entire term of the bonds, subject to appropriation by the state Legislature," Fitch analyst Kenneth Weinstein noted in a release on the bond sale.

The transaction comes as Michigan continues to struggle with one of the weakest economies in the nation, growing foreclosures, and the deterioration of the automobile industry. But rating analysts generally praise the state's fiscal management, saying it has so far shown an ability to manage the sustained economic downturn and implement unpopular decisions, such as tax increases, to offset declining revenues.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.