L.A. Yields Beat Build Americas in Biggest School Bond Week

The Los Angeles Unified School District, which is facing a bigger deficit than the city of Los Angeles, led issuers selling $445 million of Qualified School Construction Bonds this week, the most since the program began last year.

Investor bids exceeded the amount the district offered and was about three times oversubscribed, according to Jean Buckley, president of Tamalpais Advisors Inc. in Sausalito, California, the financial adviser for the deal. The district is the second-largest U.S. school system behind New York City.

The dedicated property tax “pledged to the bonds from a large diversified tax base” is one reason investors might have found the bond deal attractive, said David Blair, a municipal debt analyst for Pacific Investment Management Co. in Newport Beach, California, in an e-mail. Pimco’s Total Return Fund, with $219.7 billion in assets, is the world’s largest bond fund.

Los Angeles Unified faces a $640 million funding gap for the 2010-2011 school year, according to its Web site. It initially sent out 5,700 dismissal notices, said Moody’s Investors Service. Superintendent Ramon Cortines decided instead to shorten the academic year by five days to save $52 million and rescind 2,000 job cuts. The city’s deficit, which led to a downgrade by Fitch Ratings this month, is $485 million.

The $290.2 million taxable offering in 17-year securities, rated Aa2 by Moody’s, was broken into two parts, including $190.2 million with a 5.98 percent coupon. The remaining $100 million was bought by one investor at 5.72 percent, according to Buckley. The yield on the first portion fell 4 basis points to 5.94 percent today. A basis point is 0.01 percentage point.

Build America

The average Build America Bond yielded about 6.1 percent April 22, according to the Wells Fargo Build America Index, which tracks the taxable securities. A comparably rated taxable bond yields about 5.74 percent, according to Bloomberg fair value data. The deal was marketed by Goldman Sachs Group Inc.

The bonds are secured by a voter-approved stream of dedicated property taxes, according to the preliminary offering document.

“We saw this with BABs, which had a very wide spread last April, and as time went by buyers became more comfortable with the concept and there was a dramatic narrowing,” said Alan Schankel, a managing director at Janney Montgomery Scott LLC in Philadelphia. “A year from now the spread differential between the QSCBs and BABs will be nearly non-existent.”

About $3.3 billion in QSCBs have been sold nationwide, compared with about $97 billion in Build America Bonds, according to Bloomberg data. The federal government subsidizes as much as 100 percent of the interest costs on the school debt and a fixed 35 percent on Build Americas.

California Tax-Exempt

The yield at sale was 96 basis points higher than similar-maturity California tax-exempt general obligations sold in 2007, now rated A1 by Moody’s, which traded at 5.02 percent yesterday, according to the Municipal Securities Rulemaking Board.

“I anticipated 6.5 to 6.75 percent for this type of issue,” said Bud Byrnes, chief executive officer of Encino, California-based RH Investment Corp., which specializes in the state’s bonds. “Typically, late April is a terrible time in our market because of taxes, some people have gotten very aggressive here and I’m surprised.”

The school bond subsidy is paid directly to the borrower, a change that came last month when Congress passed the Hiring Incentives to Restore Employment Act. The program previously offered investors a tax credit on interest paid.

Osceola’s County School District in Florida sold $40.5 million in 17-year QSCBs, rated A and A2, in the second-largest school bond offering this week behind Los Angeles Unified. The securities were priced to yield 6.66 percent and traded at 6.4 percent today.

“We had been working on the deal for months and would have issued tax-credit QSCBs if the law had not changed,” said Bill Collins, chief financial officer of the district. “But net cost to us is less under the interest subsidy program.”

Next week issuers plan to sell a total of $87.2 million in school notes.

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