The Virginia Public School Authority on Tuesday plans to competitively issue $138.2 million of Series 2008A school financing bonds.

Proceeds will be used to purchase local school general obligation bonds issued by participating cities and counties for various capital construction projects through the VPSA’s loan program, according to Moody’s Investors Service.

Moody’s assigns a Aa1 to the deal, and both Fitch Ratings and Standard & Poor’s rate the bonds AA-plus.

“The rating reflects the strength of the VPSA’s long established loan program, including the commonwealth of Virginia’s strong state aid intercept mechanism, and a sum sufficient appropriation by the General Assembly that provides direct access to the commonwealth’s literary and general funds,” said a Moody’s report.

BB&T Capital Markets is financial adviser. Sidley Austin LLP is bond counsel.

The VPSA has $2.8 billion of bonds outstanding.

The mixed credit quality of the localities that make up the loan portfolio is a challenge because it consists of rated and unrated Virginia cities and counties with varying economies and wealth levels, Moody’s said. The loan program attracts a diverse group of municipalities because it improves market access, lowers borrowing costs, and offers a streamlined issuance process, which doesn’t require voter approval.

The program’s local school bonds are structured to make debt service payments two weeks before the Feb. 1 and Aug. 1 payment dates of the VPSA debt, providing a window during which state officials can implement the aid intercept provision in the case of a locality’s default, according to the rating agency.

While no locality in the program has ever defaulted on its local bonds, if one did occur then the state comptroller would withhold from the locality payment of any funds appropriated to it by the General Assembly. The payment on the local school bonds then effectively becomes a loan for which the commonwealth is repaid through retention of the locality’s state aid. Given this structure, Moody’s expects that the intercept would provide for timely payment.

If the intercept would not cover the debt service, the General Assembly biennially appropriates a sum to the VPSA that is sufficient to cover debt service costs. The commonwealth’s literary fund is the primary source of the payment, followed by the general fund, both of which provide substantial resources to pay the debt service, adds to the debt’s strengths, Moody’s said.

The state’s GOs are rated triple-A with a stable outlook from all three major rating agencies.

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