South Dakota Board of Regents Selling $90 Million of BABs

CHICAGO - The South Dakota Board of Regents will sell $90 million of revenue bonds - its largest deal ever - under the taxable Build America Bond program today to finance various projects at four of its universities.

BMO Capital Markets is the underwriter and Chapman and Cutler LLP is bond counsel. Assured Guaranty Corp. is providing insurance.

Fitch Ratings rates the insurer AA and has the credit on rating watch evolving. Moody's Investors Service rates the insurer Aa2 with a stable outlook and Standard & Poor's rates it AAA, also with a stable outlook.

BMO public finance banker Neil Pritz said based on preliminary pricing orders yesterday, the school likely will save more than 100 basis points over a tax-exempt issue. The board will apply for the 35% federal interest subsidy offered under the BAB program.

The deal is tentatively structured to include serial maturities between 2010 and 2019 and term maturities in 2031, 2035, and 2039. It includes a traditional municipal 10-year call feature.

Standard & Poor's affirmed its underlying A rating and positive outlook on the credit ahead of the sale of housing and auxiliary revenue bonds.

"The rating is based on the pledge of net auxiliary revenues of the six institutions managed by the board of regents, which is supported by a consolidated, multi-facility and multi-campus pledge," analyst Susan Carlson wrote.

The six institutions governed by the board include Black Hills State University, Dakota State University, Northern State University, South Dakota School of Mines and Technology, South Dakota State University, and the University of South Dakota. They enroll nearly 26,000 students and make up the state's public university system.

Proceeds of the sale will finance projects at four institutions, including renovations to various residence halls and construction of new residence halls, construction of a wellness center, student union improvements, and renovations to dining halls. The bonds are on par with about $103 million of outstanding debt.

The deal is structured much like a traditional municipal bond with the 10-year call feature and a mix of serial and term maturities. BMO has advised on, negotiated, and purchased competitively a handful of BAB deals with similar structures.

The firm has been promoting its ability - based on its investor client base - to do larger BAB deals with traditional structures, countering the assertion that in order to place large BAB deals of several hundred million dollars they must include typical corporate structural features with term maturities and make-whole call provisions that limit future refunding opportunities.

The Johnson County, Kan., Unified School District No. 233's $95 million sale on May 7 was the largest BAB transaction to date to use a serial maturity structure and include a 10-year call feature. The Illinois State Toll Highway Authority's $500 million sale on May 12 included a 10-year call at par but the bonds were structured to mature in two term bonds, not serially, as is favored by corporate buyers for liquidity.

"Most municipal issuers want to sell bonds with optional redemption features," Pritz said. "We can place up to $500 million of taxable bonds with a serial and term schedule and 10-year call because we are selling to crossover buyers who are used to buying taxable municipal bonds with traditional municipal structures."

The firm's taxable buyers include an investor network of banks, retail, insurance companies, and middle-market money managers. BMO ranked fourth by par amount and first by number, with 33 transactions, last year among underwriters of competitive taxable bonds, according to Thomson Reuters.

While inclusion of a 10-year call can add some cost for issuers, it preserves future refunding flexibility. The best value on BABs remains on the long end of the yield curve, but by including serial maturities, the issuer is able to capture the benefits of the ascending rates on the yield curve. BMO bankers also said the inclusion of insurance is favored by its buyers on A-level credits.

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Higher education bonds
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