That LSU Bond Deal That Was Cancelled Last Week Is Looking More And More Shady

The fallout continues over the LSU bond deal that was pulled last week after LSU President F. King Alexander irresponsibly threatened exigency. Brian Chappatta of Bloomberg has done outstanding reporting on the subject and yesterday he had more on the topic.

Here’s what we learned, it was the investors who pulled out the deal when Alexander began threatening exigency. They felt misled in the disclosures as to the true state of LSU’s finances.

Eaton Vance Management locked in an order to buy Louisiana State University bonds last week. The next day, the university said budget cuts may push it to file for the collegiate equivalent of bankruptcy.

“The minute the news came out we called and said ‘This is material information,’” said Tom Metzold, who helps oversee $25 billion as co-director of municipal investments in Boston. “Had you told me that in advance, we wouldn’t have bought that deal.”

Eaton Vance joined a buyers’ revolt that erupted after Louisiana State’s $114 million bond sale. The investors won: the university scrapped the deal after it had already been priced and allowed money managers to walk away, an unusual occurrence in the $3.6 trillion municipal market.

Or was it because LSU feared a Federal investigation for securities fraud?

The news surprised investors who had analyzed documents, circulated before the sale, that didn’t explicitly mention that possibility. The April 13 offering statement said “the university will examine all possible options to address potential reductions to state appropriations” in fiscal 2015-2016.

Fitch Ratings said in a report Tuesday that Louisiana State’s AA- credit rank, the fourth-highest, isn’t in immediate jeopardy, though it may fall depending on how the school deals with declining state funding.

“University budget adjustments that affect its financial position, reputation, or demand profile, to the extent they become necessary, could have negative rating implications,” the rating company said.

The U.S. Securities and Exchange Commission has ramped up efforts to crack down on municipal borrowers that fail to make sufficient disclosures to investors. Since the recession, the SEC has brought fraud cases against issuers including New Jersey and Illinois for making misleading financial statements.

The SEC doesn’t look too kindly upon bond issuers who don’t disclose things like a threat of bankruptcy. LSU pulled the bond whether than be subjected to SEC complaints and a resulting investigation that would’ve resulted in fines for the university.

Today, LSU students and faculty are set to march on the Capitol to protest cuts to higher ed. The march was called by LSU’s SGA and the Alumni Association. Maybe instead of marching on the Capitol, they should march on Alexander’s office and demand his resignation for putting the university at risk of a SEC investigation that would ruin its reputation on the bond market.



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