CHICAGO — The Michigan State Building Authority Tuesday will begin pricing $647 million of bonds to generate debt service relief and finance various capital projects.

All but $47 million of the bonds will be in a fixed-rate mode and will price Tuesday. The SBA will offer the variable-rate bonds on July 28.

The agency, which will have $3 billion of outstanding debt after this transaction, is one of Michigan's largest issuers and typically enters the bond market every year or two. It last borrowed in 2009 and next week's sale could be its last for two years, officials said.

JPMorgan is the senior manager on the deal and Citi is co-senior. Nine additional firms round out the underwriting team. Lansing-based Dykema Gossett PLLC is bond counsel and Robert W. Baird & Co. is financial adviser.

The borrowing is backed by state-appropriated lease payments and the ratings are based largely on Michigan's creditworthiness. Moody's Investors Service rates the state Aa3 and Standard & Poor's rates it A-plus

The state has a contractual obligation to appropriate the lease rental payments that pay off the debt, unless the buildings are considered uninhabitable for a reason outside of the state's control. In that case, the leases carry casualty insurance and rental interruption insurance to cover payments.

The transaction includes $382.5 million of refunding bonds and $262 million of new-money debt. The authority expects to save between $10 million and $15 million with the refunding, according to executive director Debbie Roberts.

The refunding will extend the debt's maturity by seven years and mean higher debt service payments after 12 years.

"The Building Authority is always looking at what can be done for savings, and right now we're cautiously optimistic that the market is going to stay nice," Roberts said.

The transaction features four series. Three of them, totaling $600 million, will be in the fixed-rate mode. Roughly $37 million of the bonds are taxable to give the state some flexibility in the use of the proceeds, according to Roberts.

The SBA opted to keep the $47 million Series II-B variable rate because recent trading was so good, she said.

The variable-rate issue will feature a short-term demand feature and be supported by a letter of credit from JPMorgan Chase & Co.

The same LOC supports the rest of the SBA's variable-rate bonds — roughly $50 million — and will expire Dec. 19, 2012.

Proceeds from the new-money piece of the deal will be used to finance a variety of new buildings and renovations, including a new state police headquarters in Lansing.

Michigan appears to be stabilizing after a decade-long recession that was driven by a decline in the manufacturing industry, analysts said. Revenues are up and the domestic automobile industry, key to the state's strength, also appears to be recovering.

But challenges remain, and chief among them are struggling local governments, Moody's warned. Cities like Detroit, Pontiac and Ecorse face major problems that could have a fiscal impact on the state, Moody's analyst Edward Hampton wrote in a report on the SBA bond sale.

Michigan's new law for dealing with fiscally stressed local governmental units, Public Act 47, gives the state broader powers of intervention and control, and that should be to its advantage, Hampton added.

"We believe that the state's existing legal framework will limit its financial exposure to the most severe crises at the local level," he said.

Standard & Poor's noted that some of the bond proceeds will be used to fund a debt-service reserve account, which will provide additional security to bondholders.

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