Utah's Board of Regents, which oversees the state's eight public colleges and universities, is making its biggest sale of debt in at least 20 years today as scheduled municipal deals fall to a three-month low.
The $365 million offering of top-rated tax-exempts will refinance existing debt, and will be backed by student-loan repayments under the Federal Family Education Loan Program, according to preliminary offering documents. Utah may have difficulty attracting investors because the government program backing it ended July 1, said Howard Cure, director of municipal research for Evercore Wealth Management LLC in New York.
"You may not have a lot of demand as they could lack liquidity" in the future, Cure said. "It's an unusual type of program."
States and local governments are set to borrow about $5.4 billion in the next 30 days, the smallest slate since Sept. 3, according to data compiled by Bloomberg. About $1.8 billion is anticipated this week, the lowest since the last week of 2009, Bloomberg data show.
Yields on top-rated tax-exempts due in five years jumped about 31 basis points, or 0.31 percentage point, this month through Dec. 15, before dropping 8 basis points through yesterday, according to a Bloomberg Valuation index. Trading desks are unlikely to make large purchases so close to year-end, according to a Dec. 17 research note from John Dillon, chief municipal bond strategist for Morgan Stanley in Purchase, New York.
'Exaggerated Volatility'
"The exaggerated volatility exhibited by the current municipal market only magnifies this annual dynamic," he wrote.
Utah's tax-exempt revenue bond includes serial maturities from three to 16 years, with the bulk coming due in November 2016 and 2017. The issue also includes $24.5 million in securities subject to the federal alternative-minimum tax, levied on high-income individuals and corporations.
About 3.9 million taxpayers were subject to the tax in 2008, and 6.3 million reported receiving tax-exempt income, according to Internal Revenue Service data.
Among the schools overseen by the board is the University of Utah, the state's flagship, which enrolls about 26,000 undergraduates, a 6 percent increase from 2009, according to a Nov. 22 report by Moody's Investors Service.
The federal education loan program enabled students to subsidize interest costs, get graduate loans and consolidate repayment of eligible grants. The program includes a 97 percent federal guarantee on defaulted loans, Moody's said Dec. 16. Loans originated under the FFELP program have a balance of about $930 million, offering documents show.
Biggest Issue
The tax-exempt issue is the largest deal the board of regents has made since at least 1990, Bloomberg data show.
The board will enter into an interest-rate swap to hedge the risk of issuing fixed-rate bonds to finance variable-rate student loans, Moody's said. The swap, with the Royal Bank of Canada, will be indexed to the London interbank offered rate, the documents show. Such contracts typically require buyers to pay fixed rates in exchange for variable payments from the banks arranging them.
Greg Stauffer, associate commissioner of finance and facilities wasn't immediately available to comment, said Joyce Cottrell, a spokeswoman.
Treasuries Decline
Treasury prices pared advances yesterday as stocks appreciated and the Federal Reserve concluded purchases of $14.6 billion in debt, the biggest amount in a single day under the second round of quantitative easing. The benchmark 10-year note yield advanced less than one basis point to 3.34 percent at 5:08 p.m. in New York, according to BGCantor Market Data.
"There's a tremendous amount of movement in this market," Cure said. "It's a funny time of year to be approaching with a big issue."
Following are descriptions of pending sales of U.S. municipal debt:
PUERTO RICO ELECTRIC POWER AUTHORITY, the commonwealth's monopoly power utility, plans to sell $500 million in revenue- backed Build America Bonds this week to help finance portions of the Via Verde project, a natural gas pipeline that is scheduled to be completed by February 2012. The power authority is rated BBB+ by Standard & Poor's and Fitch Ratings, the third-lowest of 10 investment grades. UBS AG will lead banks underwriting the securities. (Added Dec. 21)
METROPOLITAN TRANSPORTATION AUTHORITY, which runs New York City's subways, buses and commuter trains, plans to sell $350 million in Build America Bonds today to finance capital projects. Underwriters led by Barclays Plc will market the issue. In June, the authority's debt was rated A+ by Fitch, fifth-highest, and A by S&P and A2 by Moody's Investors Service, both sixth-highest.
The municipal bond defaults that have occurred during the economic downturn have been “on the fringes” of the municipal market.
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