California's $14 Billion in Sales Preceded by University Debt: Muni Credit
University of California, whose medical centers represent the third-biggest U.S. public-hospital system, is selling $700 million in taxable Build America Bonds as the state prepares to borrow $14 billion this month.
The college’s revenue-bond sale comes as the extra yield investors demand to hold 10-year general-obligation debt from California issuers instead of top-rated tax-exempts was 127 basis points yesterday, the highest since July 7, according to Bloomberg Fair Market Value data. A basis point is 0.01 percentage point.
California, the largest U.S. issuer of municipal debt, will offer $2 billion of federally subsidized, Build Americas Nov. 18 and $1.75 billion of tax-exempt, general-obligation bonds Nov. 23, according to Treasurer Bill Lockyer’s website. The state is also planning to issue an estimated $10 billion in one-year, revenue-anticipation notes next week.
“If you can beat the onslaught of issuance, it’s a good time to come to market,” said Chris Tota, a principal at Los Angeles-based De La Rosa & Co., one of the underwriters of the university bonds.
Today’s issue, the week’s largest taxable sale, carries ratings of Aa2 from Moody’s Investors Service and AA- from Standard & Poor’s, the third- and fourth-highest, respectively. The bonds are backed by pooled revenue of the system’s five medical centers, preliminary offering documents show. It totals $760 million, including $50 million in tax-exempts and $10 million in traditional taxables.
The university priced 35-year Build Americas to yield 5.95 percent on Sept. 21, or 215 basis points above 30-year U.S. Treasuries. The so-called spread widened to more than 220 basis points in trading on Nov. 5, according to Municipal Securities Rulemaking Board data.
Bonds due in May 2050 were priced at 250 basis points above Treasuries in the September sale, up from 225 basis points for the same maturity in December, the university’s prior offer.
Today’s offering wasn’t intentionally scheduled to beat the state to market, said Sandra Kim, the university system’s executive director for external finance. Getting the deal done to lock in the 35 percent federal subsidy on Build Americas was part of the planning, she said.
The Build America Bond program is set to end on Dec. 31. Legislation from U.S. Senate Finance Committee Chairman Max Baucus, a Montana Democrat, would extend the subsidy until December 2011 while reducing it to 32 percent. The program was created as part of last year’s economic-stimulus package. Previous extension plans passed by the House of Representatives stalled in the Senate. Congress has recessed until Nov. 15.
End of Subsidy
“We saw the subsidy going to end and long-term interest rates still reasonably low, so we decided to pull the trigger,” Kim said in a telephone interview.
The proceeds will help finance a new 289-bed inpatient building for children’s, women’s and cancer hospitals at the University of California, San Francisco Medical Center’s Mission Bay facility, and a medical building adjacent to the Santa Monica-UCLA Medical Center and Orthopaedic Hospital, offering documents show. Pooled medical-center revenue was about $5.9 billion for the fiscal year ended June 30, up from $5.6 billion the previous year, the documents show.
The five academic medical centers collectively represent the third-largest system of publicly owned hospitals in the nation, after the federal Veterans Administration system and New York City’s Health and Hospital, according to Moody’s.
“There’s a strong appetite,” Tota said. “UCal doesn’t come to market that often, and it’s a very strong credit.”
Lockyer plans to issue the state’s long-term bonds before a self-imposed “dark period” in December and early January, when he typically doesn’t sell debt while new economic data are prepared. Governor-elect Jerry Brown must deliver a new spending plan to the Legislature in the second week of January.
The revenue-anticipation notes are a type of short-term municipal bond the state offers when cash is low. The money is repaid with tax collections. Lockyer had been unable to sell the notes because the promise to repay them had to be included in the budget.
Following are descriptions of pending sales of U.S. municipal debt:
HARVARD, the oldest and richest U.S. university, plans to sell $741 million in tax-exempt bonds today through the Massachusetts Development Finance Agency. Harvard will use the funds to refinance long-term debt and for construction costs related to the Fogg Art Museum, according to a Moody’s report. The general-obligation bonds are top-rated by Moody’s and S&P, and will be marketed by underwriters led by Morgan Stanley. (Updated Nov. 9)
NEW YORK CITY MUNICIPAL WATER FINANCE AUTHORITY, which funds the capital needs of the water and sewer system in the most-populous U.S. city, plans to sell $500 million of Build America Bonds as soon as this week. The securities are rated second-highest by S&P and Fitch Ratings, AA+, and third-highest by Moody’s, Aa2. They will be marketed by a group led by Samuel A. Ramirez & Co. (Updated Nov. 8)
REGIONAL TRANSPORTATION DISTRICT, which manages mass- transit operations in the Denver region, plans to issue about $710 million in taxable and tax-exempt debt as soon as today. About $267 million will be Build America Bonds issued as certificates of participation. Another $300 million will be conventional Build Americas. The RTD is selling $100 million in traditional tax-exempts and another $43 million in tax-exempt certificates. Bonds, rated AA, will be backed by sales tax, with the so-called COPs, rated AA-, backed by system revenue, according to Fitch. Banks led by Morgan Stanley will market the COPs, and Goldman Sachs Group Inc. will handle the bonds. (Updated Nov. 9)