Build America Bond Record for Lowest Cost Set by AAA Virginia: Muni Credit

Virginia, one of seven states with a top ranking from all three major credit-rating companies, sold $143 million of taxable Build America Bonds at the lowest cost relative to U.S. Treasuries since the program began.

The state is using the federally subsidized bonds to finance construction costs for projects at its colleges including, Virginia Tech, George Mason and James Madison, according to preliminary offering documents. The bonds, which will be paid from university revenue, and will carry the full faith and credit of the state.

Securities due in June 2040 were priced to yield 4.70 percent, according to Director of Debt Management Evie Whitley. The extra yield investors demanded for the bonds over 30-year Treasuries was about 0.88 percentage point, the lowest so-called spread for such a maturity in the program’s 19-month history, according to data compiled by Bloomberg. Virginia received 10 bids for its offering, Whitley said.

“It’s certainly gratifying and reassuring to know that we can find reception in the market,” Whitley said. “This way we’re able to pass along great rates to our students.”

Virginia yesterday benefited from risk aversion among municipal and taxable investors, said Howard Cure, director of municipal research at Evercore Wealth Management in New York.

‘Stable’ Credit

“It’s a flight to safety,” said Cure, who oversees about $2 billion. “In an era where folks are concerned about credit, Virginia has been stable.”

The Texas Transportation Commission sold 30-year Build Americas last month at yields of 4.68 percent, the lowest absolute yield, though the spread was 95 basis points, Bloomberg data show. The University of Virginia’s 4.9 percent yield in July was the previous low yield, and the prior lowest spread at 94-1/2 basis points.

As Treasury yields have risen for the last five straight days, the extra yield investors want for Build Americas has receded. The spread reached a four-month low of 173 basis points Oct. 12, according to the Wells Fargo Build America average yield index.

Build America Bonds, the fastest-growing part of the $2.8 trillion U.S. municipal debt market, were first sold in April 2009 as part of the economic stimulus package and include a 35 percent federal subsidy on interest-rate costs. Legislation introduced by Senate Finance Committee Chairman Max Baucus would extend the program, which expires Dec. 31, by one year with the subsidy reduced to 32 percent. Previous extension attempts stalled in Congress. About $144 billion have been issued.

Annual Quota

Yesterday’s sale was all the state’s general obligation borrowing this year, and wasn’t timed to lock in the current 35 percent subsidy rate, Whitley said.

“It wasn’t an effort to get in under the wire or anything like that,” she said. “Fall tends to be the time of year to finance. We were beyond pleased with the outcome of the sale.”

Virginia accepted bids for $168 million in debt with the option to sell as all Build Americas, all tax-exempts or a combination of the two. The state offered about $25 million as tax-exempts, Whitley said.

“Virginia has a triple-A credit rating, is a marquee name in the marketplace, and Citi is pleased to have won this bid,” Alexander Samuelson, spokesman for winning-bidder Citigroup Inc., said in an e-mail.

The other six states with top ratings from the three major companies are: Delaware, Georgia, Maryland, Missouri, North Carolina and Utah.

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

CHICAGO BOARD OF EDUCATION, which oversees the third- biggest U.S. city’s public-school system, will issue $257.1 million in taxable Qualified School Construction Bonds as soon as today. The proceeds will pay for construction and renovation to relieve overcrowding. Underwriters will be led by Loop Capital Markets. The debt is rated Aa2 by Moody’s Investors Service, third-highest, AA- by Standard & Poor’s, fourth- highest, one level above Fitch Ratings’ A+ rating. (Updated Oct. 14)

CITY OF CHICAGO, whose Midway Airport trails only San Francisco and Miami in delayed departures among big-city airfields, will issue $251 million in securities today backed by the airport’s revenue. The debt will include $88 million in taxable Build America Bonds earmarked for construction. Underwriters led by JPMorgan Chase & Co. will market the securities, which carry ratings of A3 from Moody’s and A- from both S&P and Fitch, all fourth above non-investment grade. (Updated Oct. 14)

NORTH CAROLINA TURNPIKE AUTHORITY, which provides financing for selected toll roads, plans to sell $275 million in taxable and tax-exempt bonds today, including $250 million in Build America Bonds. The proceeds will finance land acquisition, design and construction of the Monroe Connector System, a 19.7 mile (32 kilometer) tollroad in Mecklenburg and Union counties, service existing debt and fund the authority’s reserve. Bank of America Merrill Lynch will lead underwriters marketing the securities, which are rated Aa2 by Moody’s and AA by S&P, both third-highest. (Updated Oct. 14)

MONROE COUNTY INDUSTRIAL DEVELOPMENT CORP., which provides financial assistance to projects for its more than 1 million Rochester-area residents, will borrow $210 million in tax-exempt bonds today. The securities will be used to finance a renovation of Park Ridge Hospital, in Rochester, New York. Underwriters led by JPMorgan Chase & Co. will market the issue, which is rated Aa2, third-highest, by Moody’s. (Updated Oct. 14)

To contact the reporters on this story: Brendan McGrail in New York at bmcgrail@bloomberg.net; Alexandra Harris in New York at aharris48@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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