CHICAGO - Southern Illinois University will enter the market as soon as next Thursday with $54 million of tax-exempt and taxable Build America Bonds in a deal led by BMO Capital Markets, which the school picked due to its work on a handful of similarly structured BAB transactions over the last two weeks.
The revenue bond deal's timing and use of the BAB program still hinges on interest rates and taxable and tax-exempt spreads. The university's financial adviser John Vincent said, "There is sufficient benefit for Southern in the current market, so we are trying to get to the market as soon as possible."
About $3 million in present-value savings are expected through the use of the BAB program, with savings on individual maturities expected to range from 20 to 90 basis points. The university will apply for the federal government's direct-pay 35% interest subsidy under the program included in the federal stimulus program.
The current plan is to issue a $6 million tax-exempt series and a $48 million taxable BAB series, although the size of each could shift depending on the market. The finance team expects to finalize insurance coverage this week. The BABs will mature serially through 2030 and the deal includes a traditional 10-year call feature.
Proceeds will finance a new football stadium and the renovation and expansion of the university's basketball arena, said assistant treasurer Tina Galik.
BMO is the book-running senior manager and Barclays Capital the co-senior manager. Chapman and Cutler LLP is the bond counsel. The university chose BMO from its approved list of senior managers due primarily to its participation in three recent BAB deals that were structured to mature serially and included a traditional 10-year call.
BMO served as financial adviser on the DuPage, Ill., Community College District 502's competitive transaction last week and was the winning bidder on the $62.4 million BAB piece offering a 5.208% rate that with the interest rate subsidy factored in was 3.397%.
The firm asked the college for permission to bid "because we thought we could add value," said Michael Boisvert, a senior vice president at BMO.
BMO also was the winner bidder on De Pere, Wis.'s competitive sale last week of $2.7 million. The firm submitted a 5% taxable bid that with the subsidy factored in brought the true interest cost down to 3.28%. The broker-dealer also served as the lead underwriter on Illinois' Plainfield Fire Protection District's negotiated sale of $8.1 million of BAB bonds two weeks ago. The bonds carry a TIC of 6.14 % that with the subsidy added brings the rate down to 4%.
"BMO has successfully marketed BABs with serial maturities to their investor network of banks, retail, insurance companies, and middle-market money managers," Vincent said. "With serial maturities, you get the benefit of the ascending yield curve." The larger transactions from California and the New Jersey Turnpike Authority were structured as large bullet maturities further out on the yield curve - a structure favored in the corporate market for its liquidity.
A taxable BAB transaction using a serial structure and call feature that is the preference of some issuers plays to BMO's strength as a top-ranked underwriter last year of taxable bonds in the competitive municipal market. The firm ranked fourth by par amount and first by number, with 33 transactions. Barclays is the top-ranked competitive taxable underwriter by par amount, according to Thompson Reuters.
"We have a network of buyers that are very different from those of Wall Street firms that want the make-whole calls and bullet maturities," Boisvert said. "We sell to a smaller group in the taxable municipal market that is used to 10-year calls, serial maturities, and aggressive yields."
Like other issuers that have included a 10-year call, the university sought to preserve its ability to refund the bonds down the line even though the call adds to yields. The larger transactions over the last two weeks have instead included the make-whole call provisions standard in the corporate market that can strip the potential savings of a refunding.
"It was really important for us to keep the flexibility in the event there was some change in the subsidy program," Galik said. The university, the second-largest public university in the state, is a conservative issuer that has only fixed-rate debt. Some issuers remain concerned over the federal government's long-term commitment to maintaining the subsidy even though officials have said the subsidies are to be treated like a tax refund and likened to an ongoing permanent appropriation.
Standard & Poor's recently affirmed the university's A-plus rating and stable outlook on the system's housing and auxiliary revenue bonds, and Moody's Investors Service affirmed its A1. Moody's also removed the credit from its negative watch list and assigned a negative outlook, affecting $327 million of debt.
Moody's took the credit off watch list in recognition of the university's success in coping with the fiscal strains tied to the state's liquidity pressures, and the outlook reflects ongoing analyst concerns over the state's financial position and delays in state payments.
Analysts tie the credit to Illinois - which was recently downgraded to A1 - because of its reliance on the state for 40% of its revenues. Galik said the state at times over the last year has fallen 120 days behind, owing the university $80 million, but that the payments have been improving. The university has $200 million in liquid operating funds to tap if needed.
The university operates two campuses in Carbondale and Edwardsville and has an enrollment of 29,065. Revenues pledged to debt service provide 1.9 times coverage.