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Rutgers Markets First Build America Bond Offering: Muni Credit

Rutgers Sells First Build America Bonds
The borrowing will fund a new dining hall, dormitories and infrastructure. Photographer: Emmanuel Dunand/AFP/Getty Images

Rutgers, the eighth-oldest university in the U.S., is selling $391 million in Build America Bonds, its first such sale, with yields on the taxable securities close to the highest level in 10 weeks.

The New Jersey state university’s inaugural offering of the federally subsidized securities follows last week’s $4.9 billion in sales, the second-highest in the Build America program’s history, according to data compiled by Bloomberg. Average yields on the debt rose about 30 basis points, or 0.3 percentage point, last month to 5.86 percent on Oct. 29. The yield was 5.88 percent the previous day, the highest since Aug. 12, according to a Wells Fargo index. About $1.9 billion of the bonds are scheduled for sale this week, Bloomberg data show.

With Build America issuance outpacing demand, Rutgers will need to pay extra yield to increase investor interest, said Fred Yosca, head of fixed-income trading at BNY Mellon Capital Markets LLC in New York.

“They’re going to have to be competitively priced,” Yosca said. “There’s not a lot of money this time of year, and with everybody issuing, it’s just an imbalance.”

Build Americas, which currently provide issuers a 35 percent federal subsidy on interest costs, are set to expire on Dec. 31. Legislation introduced by Senate Finance Committee Chairman Max Baucus, a Montana Democrat, would extend the Build America Bond program, which was created as part of the economic stimulus package in February 2009, by one year with the subsidy reduced to 32 percent. Previous extension plans passed by the House of Representatives stalled in the Senate.

“We’re afraid the program might not get extended,” said Bruce Fehn, the school’s senior vice president for finance and administration, in a telephone interview. “We wanted to get it done before the subsidy expired.”

First Build Americas

This is the first Build America sale for the university, Bloomberg data show. The school enrolled more than 47,000 full-time students at its three campuses last year, and the debt will help finance the creation of a business facility on its Livingston campus, Fehn said. The borrowing will fund a 1,500-bed dormitory, a new dining hall and infrastructure improvements.

Additionally, these Build Americas will pay for the building of 500-bed housing on the Busch campus, the primary location of the school’s science and engineering students, according to Fehn. This week’s offering totals $508 million, including $109 million in tax-exempts and $8 million in traditional taxables, preliminary offering documents show.

Credit Ratings

The debt is rated Aa2 by Moody’s Investors Service and AA by Standard & Poor’s, both third-highest. The bonds will be secured by the college’s full faith and credit, and a pledge of university revenue, the documents show. New Jersey education cuts have lowered state aid to Rutgers about 20 percent since 2008 to $262.5 million this year, Moody’s said.

Given the quality and backing of the issue, the offering should be well received because “there’s huge demand for public higher education,” Fehn said.

The University of Massachusetts Building Authority, also rated third-highest by Moody’s and Fitch Ratings, sold $430 million in Build Americas on Oct. 21. Bonds due in November 2040 were priced to yield 5.45 percent, or about 149 basis points above 30-year U.S. Treasuries.

About $279 million of Rutgers’s Build Americas will mature in 2040, offering documents show. The bonds include an extraordinary redemption provision should the federal government cease to provide the interest-cost subsidy.

Rutgers last offered debt in February 2009, with 30-year tax-exempts, the bulk of the sale, priced to yield 4.98 percent, or about 15 basis points above top-rated general obligations, according to a benchmark Bloomberg Valuation index.

The securities traded Oct. 20 at an average yield of 3.82 percent, 4 basis points above a comparable-maturity AAA index.

Rutgers plans to begin building the business school, projected to serve 3,200 undergraduate and 300 graduate students, in the next 12 months, Fehn said.

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