Balfour Beatty calls Florida Atlantic University's (FAU) $124.1 million tax-exempt Build America bond (BABs) issue, to build new student residences, a public-private partnership, though there is limited private-sector exposure, no equity contribution and the debt financing is predominantly municipal.

However, the deal indicates that municipal bond investors have appetite for private investment and risk sharing. The structure might provide a new issuer base for BABs beyond the purely public issuers for which they were designed. The bonds were issued in three series, underwritten by RBC Capital Markets.

The issuer is the FAU Board of Trustees, formed in 2009 as a not-for-profit entity, and thus able to issue tax-exempt and BAB debt without buyers being subject to ad valorem taxes. The issuer will also receive 35% of interest paid on BABs in the form of a direct pay subsidy from the US government under the terms of the February 2009 American Recovery and Reinvestment Act.

The BAB product was originally intended as a temporary measure, and was due to reach its sunset at the end of 2010. The product has proved more popular than expected in the municipal market, because bookrunners do not need to pay attention to buyers' tax circumstances, and the Obama administration has proposed making BABs permanent (though reducing the subsidy to 28% of interest paid) and widening the terms of use for BABs.

New uses may include the refinancing of existing municipal projects and the funding of short-term working capital. If the terms are broad enough to include some privately-developed and operated projects, they might complement the private activity bond (PAB) market by permitting borrowers to fund brownfield construction and upfront concession payments.

The $112.445 million tranche of senior BAB debt was issued in a number of series with varying maturities, which carried coupons of between 5.477% for smaller issues of ten-year notes, and up to 7.639% for the 30-year notes. The effective interest rate on the bonds, net of interest subsidies, is 4.77%.

The $8.475 million of series A tax-exempt bonds, which rank pari passu, priced at either 4% or 5% depending on maturity, which ranged from 2013 to 2016. Standard and Poor's and Fitch gave the bonds A ratings, while Moody's rated them A2.

Balfour Beatty Capital Group has purchased $3.365 million of subordinate bond debt, which was unrated and not offered for general sale. These bonds are subordinated in all aspects, including payments of principal, interest, and any possible premium, and follow both of the senior series and any operating expenses in priority.

According to Louis DeRogaris, senior vice-president, finance, at Balfour Beatty, the BAB financing structure offered the lowest cost of capital to FAU, but the university wanted Balfour Beatty to assume at least some degree of risk, which is why it issued the subordinate bonds. The investment is Balfour Beatty's risk capital contribution. As developers, DeRogaris also says that Balfour Beatty would be "on the hook for any delay in construction."

Balfour Beatty Capital will be paid a development fee from FAU for delivering the project. Balfour Beatty Campus Solutions and Capstone Development Corp will develop and construct the new residence under a fixed-price construction contract of $66.1 million.
FAU will use the proceeds of the bonds to build new student residences at its Boca Raton Campus, including acquiring new leases, and paying existing leases, on the land where the existing facilities are located, and construction of a 504,000 square-feet housing unit that will accommodate up to 1,216 students. The construction will also include new sports and recreational facilities. Construction has begun, and is due to be complete by August 2011.

Proceeds will also be used to fund a reserve account, which FAU believes will bear interest at 2%, and fund capitalised interest on the 2010 Series A bonds. The issuer also has the right to issue additional senior-secured bonds against the project, which would rank pari passu with this debt, providing it meets a 1.25x coverage test.

Debt service is annual, and ramps up until 2030. Interest repayments are capitalised during construction until 2012. FAU will pay down its debt from income from rent on the accommodations, and the base case assumes a 95% occupancy rate during academic term-time and 30% occupancy out of term, though these occupancy levels are not guaranteed. While rent is cheaper in student accommodation, the underwriter notes that private housing could pose competition. FAU also has outstanding municipal debt on its existing residential facilities in the form of Housing Revenue bonds.

The FAU deal suggests there are new ways for municipal bond issuers to work with private capital, without diminishing the benefits of tax exemptions or tax subsidies. Other asset classes traditionally financed through municipal debt such as schools and hospitals could adopt this kind of model, and set a precedent which could be developed when the BAB extensions are in place from 2011.

In the meantime, allowing the private partner to assume some degree of risk through subordinate bond placement and construction obligations, while the project benefits from the cheaper cost of debt through tax exemptions and ARA products is a workable middle way. Similar structures have cropped up in the military housing market, where developers are increasingly assuming risk though subordinated debt tranches and development fees rather than project company equity, in response to the US government's preference for projects to be structured as not-for-profit entities.

FAU Finance Corporation
Status: Closed March 2010
Size: $124.1 million
Location: Boca Raton, Florida
Project: Student housing at FAU Boca Raton campus
Sponsor: FAU/Balfour Beatty Capital Group
Debt: $112.445 million
Tax exempt bonds: $8.475 million
Subordinate bonds: $3.365 million
Bond underwriter: RBC Capital Markets
Bond Counsel: Bryant Miller Olive
Sponsor legal: Office of General Counsel, Boca Raton
Sponsor financial adviser: Dunlap & Associates
Developers: Balfour Beatty Campus Solutions/Capstone Development Corp.
Environmental engineer: Miller Legg