A group of bondholders is challenging a recent $1 billion issuance by the Regents of the University of California.
The investors began challenging the university in early March, ahead of a $1.1 billion issuance that priced later in the month. In a letter sent to the university on March 4, the investors said there was “no legal basis” for the issuance to proceed, Bloomberg reports.
Efforts to challenge the issuance accelerated after the deal priced. On March 20, the law firm Kramer Levin, which is representing the investors, contended that the basis underpinning the bond sale was flawed. In a statement released on March 25, the university added a supplement to the bond documents warning of the challenge. The supplement described the aggrieved investors as a group of “unidentified” bondholders.
The challenge is focused on a provision that allows some municipal issuers to call taxable debt and replace it with tax-exempt bonds (which pay lower yields) in the presence of an “extraordinary event.” The university’s tax-exempt Series 2024BV issuance intends to call taxable bonds that it sold in 2009 and 2010. The school says that a federal decision to cut subsidies that were baked into its bond sales in the aftermath of the Great Recession constitutes such an event.
The university said in the supplement that it intends to proceed with the redemption of the refunded bonds, which is scheduled for tomorrow. It does not expect the challenge to have a “material adverse impact” on the university’s financial position or ability to pay debt service, according to the supplement.
The investors argue that if the issuance proceeds, their own financial position would be impacted. In the most recent letter to the university, they said that if the university does not cancel the refinancing, they reserve the right to “pursue an action against the Regents for breach of contract, breach of implied duty of good faith and fair dealing and unjust enrichment, at a minimum.”