University of Virginia Build America Is First 30-Year Sold Below 5% Yield

Top-rated University of Virginia sold $190 million of 30-year Build America Bonds yesterday to yield 4.9 percent, the lowest on record for that maturity, according to data compiled by Bloomberg.

The university, founded by Thomas Jefferson in 1819, became the first borrower to offer a 30-year Build America Bond with a 5 percent coupon since the federal government created the subsidized taxable municipal securities last year, Bloomberg data show. The previous low was 5.14 percent in a Washington state issue sold in May, Bloomberg data show.

“Something like Virginia is going to get prime attention,” said Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia. “People have been waiting for real high-grade names.”

The average Build America Bond yielded 5.94 percent yesterday, according to an index that Wells Fargo & Co. began last August. The so-called spread above 30-year U.S. Treasuries reached 203 basis points as the borrowing costs for federal government debt fell amid signs the economy is slowing, Bloomberg data show. A basis point is 0.01 percentage point.

Since they were created as part of last year’s $862 billion economic-stimulus package, states, local governments and public agencies have sold about $121 billion of the securities. The U.S. Treasury pays issuers 35 percent of their interest costs if states and other public borrowers sell taxable instead of tax- exempt securities for new capital projects. Private nonprofits such as Harvard University don’t qualify. The program expires at year-end.

‘Quality Bond’

“I am very pleased with the outcome,” Yoke San Reynolds, the University of Virginia’s chief financial officer, said yesterday in a telephone interview after the school’s bonds were sold through competitive bidding. “We do not issue very often and we are a ‘triple-A.’ We are a quality bond.”

The university was the first to sell Build America Bonds, offering $250 million of the securities maturing in 30 years on April 15 last year at a yield of 6.22 percent, about 256 basis points more than comparable Treasuries, according to Bloomberg data. The yield for yesterday’s issue was about 95 basis points higher than the 30-year Treasury rate.

Proceeds will be used to finance capital projects at the campus in Charlottesville as well as at the university medical facility, including the Emily Couric Cancer Center, named after the late Virginia state senator and sister of “CBS Evening News” anchor Katie Couric, according to the bond prospectus.

‘Ambitious Program’

The university has an “ambitious capital program” with plans to spend $576 million on projects during the “next several years,” adding another $160 million of debt by the end of fiscal 2012, according to a report from Moody’s Investors Service.

Reynolds said subsidies from the Build America program saved capital projects that would have otherwise been canceled or postponed after the university’s endowment fell 21 percent in the 2009 fiscal year to about $3.6 billion, according to a report from the National Association of College and University Business Officers. Schools such as Harvard and Yale scaled back their capital spending.

Yields on top-rated, tax-exempt general obligations fell 2 basis points yesterday to an average of 2.86 percent, the lowest in at least nine-and-a-half years, according to Municipal Market Advisors data since January 2001. The securities have not had an increase in yields since June 15.

To contact the reporters on this story: Michael McDonald in Boston at Mmcdonald10@bloomberg.net; Brendan A. McGrail in New York at bmcgrail@bloomberg.net.

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