WASHINGTON — Wake County, N.C., on Wednesday will issue $34.9 million of qualified school construction bonds — its first such issuance and the state’s largest QSCB deal since the beginning of the program.
The transaction comes as market participants said they expect QSCB issuance to increase in the state. Many issuers had delayed QSCB deals until Congress in March converted the securities from tax-credit bonds to taxable bonds that provide issuers with direct subsidy payments.
Now that the QSCB market has opened up to the same investors interested in Build America Bonds, North Carolina’s issuance is revving up.
QSCBs “are definitely moving forward,” said Ben Matthews, director of school support in the state’s Department of Public Instruction. North Carolina allowed counties to issue their 2009 allocation for QSCBs this year.
As a result, if counties want to take advantage of their full allocation they will need to sell a double-dose of QSCBs this year. The state’s application deadline for projects to be funded with the bonds is June 15. The $11 billion of federal funds for QSCBs expires on Dec. 31, 2010.
The QSCBs had trouble attracting investors’ interest as tax-credit bonds.
“The problem was we could not find buyers,” Matthews said. And when issuers did find buyers — like Guggenheim Partners LLC, the largest buyer of QSCBs last year — issuers were charged interest.
According to the North Carolina treasurer’s department, eight counties issued QSCBs before they could be sold as direct-pay subsidy bonds, like BABs. Issuers paid between 0.5% and 2.17% in supplemental interest on securities that were supposed to be zero-interest tax-credit bonds.
“Because the buyers could levy interest, they did,” Matthews said.
North Carolina received a $277 million QSCB allocation for this year, including specific allocations for its five-largest counties. Wake County’s $34.9 million deal combines its allocation for 2009 and 2010. In North Carolina, counties issue bonds for school districts.
Wake County, the state’s third-largest issuer last year, will issue the bonds with a bullet maturity in 2027, a strategy that might provide an additional savings to issuers over series maturities, according to market participants.
Bullet maturities, a relatively new structure for traditionally tax-exempt issuers, can be more expensive at first, but the savings can add up over the life of the bond.
“There is a smaller universe of buyers” for bullet maturities, said J. Walter Goldsmith, senior vice president with Davenport & Co. in Charlotte. “If you have a serial maturity, you have a much broader universe of buyers.”
With the bullet-maturity structure on QSCBs, instead of making annual principal payments to the investor, the issuer makes equal annual payments into a sinking fund. The fund is then used to pay off the bond at maturity, Goldsmith said.
The issuer is able to invest the sinking fund and potentially avoid rebate on investments in the fund, so long as the earnings do not exceed the permitted sinking-fund yield interest rate updated monthly by the U.S. Treasury Department. The current maximum permitted yield is 4.33%.
Depending on its debt portfolio, an issuer can “more than offset the higher cost that they would have on the bullet maturity” with interest earned on the sinking fund, Goldsmith said.
Wake County is rated triple-A by all three major rating agencies.
Morgan Keegan & Co. and RBC Capital Markets are co-underwriters on the deal. Womble Carlyle Sandridge & Rice PLLC is bond counsel and Parker Poe Adams & Bernstein LLP is representing the underwriters. Waters & Co. is financial adviser.