Investors hire Kramer Levin to challenge Univ of California BABs deal
2 min read
Investors turned up the heat Wednesday on the R
Orrick also declined to comment on the legal letter from Kramer Levin.
Orrick’s reasoning is “mistaken” and “unsound,” and “acting on it would be subject to straightforward legal challenge,” said Kramer Levin in its six-page letter to the regents. The firm said it represents investors who “hold or manage hundreds of millions of dollars” of the university’s refunded BABs and who include “some of the largest financial institutions in the country.”
Kramer Levin outlines a trio of legal arguments challenging the transaction: there has been no adverse change to the federal statute governing BABs; the sequestration cuts — trimming the 35% subsidy to 33% — are “miniscule by any metric” and therefore not material; and that the refunding is untimely because sequestration began in 2013 and the issuer opted not to take advantage of it for 10 years until the market became more favorable.
“The Regents are not entitled to undertake this extraordinary redemption, and should cancel it,” the group said. “Should it nevertheless proceed, it must pay bondholders the make-whole redemption amount, which we estimate as at least $120 million greater than the currently proposed extraordinary redemption amount.”
Complicating the issue is that the university has already priced the $1.1 billion deal, which is set to close next week.
The Regents did not immediately respond to a request for comment.
“I don’t think anyone necessarily knows what’s correct, but this is why we have lawyers to figure this out,” said Matt Fabian, partner at Municipal Market Analytics, adding that it’s not a “great” situation for bondholders, especially those who have been carrying the bonds too far above the price.
“That’s the risk of this kind of a structure,” Fabian said. “Asset managers have a fiduciary responsibility to their investors,” he added. “This is potentially a large loss, so they’re more or less compelled to litigate.”
An investor who holds Regents BABs and is against the recent deal said current market conditions point to the University of California making the decision based on tax-exempt rates and not materiality of the subsidy reduction.
“The reason why this is happening right now is because it’s not necessarily how much savings can be achieved by the university or anyone that’s contemplating these ERPs; it has to do with where they can refinance in the tax-exempt market,” they said.
The definition of ERP criteria is “highly debatable” and market participants’ opinions on the issue will impact the buying of BABs, said Alice Cheng, a municipal credit analyst at Janney.
“If they’ve calculated that the investment is worth the risk, we’ve seen customers buying more, but we have also seen customers not interested at all,” Cheng said. “It needs new precedents to set the tide.”
