Record Build America Risk Premium Boosts Cost for Los Angeles College Debt

Los Angeles Community College District, the largest two-year system in the U.S., plans to sell $900 million in Build America Bonds as the yield premium that investors demand on the debt rose to a record.

The taxable offering include maturities of 32 and 39 years that may be priced to yield 255 and 270 basis points respectively above the benchmark 30-year Treasury, according to a person with direct knowledge of the sale. A basis point is 0.01 percentage point.

The so-called spread rose to 207 basis points on average yesterday from about 150 three months ago, according to a Wells Fargo index that began last August. The reading comes as Treasury yields have fallen about 50 basis points since May 3 amid signs of a slowing economy.

“Of all the ‘L.A.’ names, the community college district is the best name right now,” said Bud Byrnes, chief executive officer of Encino, California-based RH Investment Corp., which specializes in the state’s securities. “It’s really well regarded and trades well, but it’s getting tainted by the fact it has ‘L.A.’ in it.”

The City of Los Angeles had its debt rating cut one level to Aa3, fourth-highest, by Moody’s Investors Service and one step lower, to A+, by Fitch Ratings in April on difficulties in balancing the budget of the nation’s second-largest city by population.

The district, with 141,000 enrolled students on nine campuses, plans to use today’s federally subsidized issue for construction and renovation, including a so-called green- technology student union at Los Angeles City College and a performing-arts center at Los Angeles Valley College.

Additional Sales

The district is also scheduled to issue $175 million in tax-exempts today, according to data compiled by Bloomberg, and is “contemplating” the sale of $125 million in other taxable bonds, Chief Financial Officer Jeanette Gordon said in an e- mail, without providing details.

Moody’s rated today’s issuance at Aa1 or second-highest. The last time the college district came to market, it ranked a step lower, at Aa2, prior to a recalibration to make classification of municipal debt comparable with corporates.

The 2008 issue of $621 million in tax-exempts sold at a premium with investors paying more than 102 cents on the dollar for 25-year maturities, according to Bloomberg data. The yield of 4.69 percent was 11 basis points below top-rated 25-year general obligations, according to Municipal Market Advisors.

Those bonds traded July 7 at a 4.83 percent average yield, 62 basis points above benchmark AAA debt due in 2033.

Illinois Spreads

Yield spreads shrank on $900 million in Build America Bonds offered yesterday by Illinois, which investors may see again today, said Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia.

“When it started out, the talk was like 360, and it ended up at 325” basis points above Treasuries, Schankel said of Illinois’ offering. After the Philadelphia area’s Delaware River Port Authority decided against issuing BABs last week, that created additional demand for Illinois, he said.

“Municipal credit concerns” as states struggle to close deficits amid declining revenue helped push Build America spreads wider, Janney analysts wrote in a monthly report released yesterday. Anticipation of the Illinois sale also “has had a negative impact on all BAB levels,” they wrote.

“We believe that BAB spreads will again narrow, as credit concerns begin to recede and the market presence of BABs increases,” the report said.

Yields on top-rated, tax-exempt general obligations fell 2 basis points yesterday to an average of 2.91 percent, the lowest in at least nine-and-a-half years, according to MMA data dating to January 2001.

Build America issuers have sold about $120 billion of the securities since their creation last year as part of the federal economic stimulus.

Following are descriptions of pending sales of municipal debt in the U.S.:

MIAMI-DADE COUNTY, whose Miami International Airport is the largest U.S. gateway to Latin America, plans to offer about $524 million in aviation-revenue bonds as early as next week. The securities, rated the fourth-lowest investment grade at A- by S&P, and fifth-lowest by both Moody’s, at A2, and Fitch, at A, will be used for capital improvements and to refinance debt. The bonds will be marketed by a group led by JPMorgan Chase & Co. (Added July 13)

NEW YORK CITY, the third-largest municipal borrower in the U.S., plans to sell $800 million in general-obligation bonds the week of July 26 to refinance debt. The bonds, rated Aa2 by Moody’s and AA by S&P and Fitch, all third-highest, will be marketed by a group led by Barclay’s Plc. (Added July 15)

To contact the reporters on this story: Justin Doom in New York at jdoom@bloomberg.net; Brendan A. McGrail in New York at bmcgrail@bloomberg.net;

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