UC Regents proceeds with BABs redemption despite threatened lawsuit

The Regents of the University of California plans to officially close its deal that redeems outstanding Build America Bonds via an extraordinary redemption provision despite the threat of an investor lawsuit.

The Regents said in a supplement to its official offering statement they plan to proceed with the issuance of 2024 Series BV bonds, which was part of a $1.1 billion deal of general purpose bonds the Regents priced in early March, and the redemption of the refunded BABs, closing the books on the deal Wednesday.

The UC Regents noted in the document that investors have threatened to sue if the university system fails to either cancel the redemption or pay the make-whole price.

Regardless of how these matters play out, the Regents said it does not believe they will have a material adverse impact on its financial position nor its ability to pay the debt service on all of its outstanding debt, according to the supplement posted Monday.

Investors in the refunded bonds do not appear to be penalizing the issuer in secondary trading. Recent block trades of longer maturities of refunded University of California tax-exempt bonds show yields and spreads remain similar to the original pricing and are tracking with general market movements.

The crux of the debate centers on whether issuers are legally authorized to trigger the extraordinary redemption provision following cuts to BABs’ 35% subsidy under the government sequestration process, starting in 2013. The current sequestration level is 5.7%.

BABs refundings through the extraordinary redemption provision only recently entered the conversation in a prominent manner following a 2023 court opinion stemming from Indiana Municipal Power Agency v. U.S.

J.P. Morgan reports the total extraordinary redemption provision calls, conditional calls and notices so far this year total $9.21 billion.

Afterward the ruling, Orrick partners Charles C. Cardall and Barbara Jane League said in a report posted on the firm’s website that the decision provides “favorable guidance” for issuers wondering if sequestration “constituted an ‘extraordinary event’ that would trigger their right to seek extraordinary optional redemption.”

The bondholders holding the UC Regents BABs disagreed, sending a letter challenging the legality of the university system’s ability to trigger an extraordinary optional redemption provision to refund their outstanding BABs just after the March 5 deal priced.

The bondholders wrote in the initial letter that they believe “unequivocally” that the Regents of the University of California “has no legal basis to redeem any of the above securities pursuant to exercising the Extraordinary Optional Redemption provisions.”

In a letter sent by Kramer Levin on March 20, the law firm warned if the regents failed to cancel the redemption or pay the make-whole redemption amount, it reserved the right to take legal action.

The law firm outlined several legal arguments challenging the transaction, including that there has been no adverse change to the federal statute governing BABs, meaning an extraordinary redemption provision does not qualify as an ‘extraordinary event’; the sequestration cuts are “minuscule by any metric” and therefore immaterial; and that the refunding is untimely because the issuer opted not to take advantage of it for 10 years until the market became more favorable.

The bondholders’ representative said they are awaiting a response from the Regents before moving forward with next steps, which would include a lawsuit for damages of at least $120 million for the make whole redemption amount.

“Hopefully other issuers will stop and reconsider before moving forward with these refundings on speculative grounds,” a bondholders’ representative said.

The state of Washington is pricing Tuesday $1.08 billion state motor fuel tax and vehicle related fees refunding revenue bonds in a deal to refund outstanding Build America Bonds issued in 2009 and 2010. It received query emails from investors, but no threat of lawsuit on its deal.