Pennsylvania Wednesday will take bids for $900 million of general obligation debt — including the largest competitive Build America Bond transaction thus far.
This will be the state’s first new-money bond issuance in fiscal 2010, which began July 1.
The government typically issues long-term debt in November or December, but a legislative stalemate over the fiscal 2010 operating budget and a bill to expand gambling in Pennsylvania held up approval of the annual capital debt act.
Lawmakers approved the fiscal 2010 borrowing plan on Dec. 16.
The Series 2010 bonds will be the first-ever BAB issuance for the Keystone State, which must issue new-money debt on a competitive basis. When Pennsylvania last sold new-money bonds in May 2009, the BAB market was in its infancy and negotiated transactions were the rule for large issues.
“When the BAB market was first evolving in the spring of 2009, the way we needed to issue in terms of serial maturities and competitive bid and a lot of traditional structures of a tax-exempt issue weren’t really established in the taxable market at that time,” said Rick Dreher, director of the bureau of revenue, cash flow, and debt. “So the BABs market has really moved closer to us in terms of traditional tax-exempt structuring rather than Pennsylvania moving to the market.”
Pennsylvania’s planned sale of $600 million of BABs would be the largest competitive BAB deal since the federal program began in early 2009, according to Thomson Reuters. To date, the Virginia College Building Authority has sold the biggest competitive BAB deal — $390.5 million on Dec. 2.
About 250 mostly small BAB issues have been sold competitively since the bonds were created under the American Recovery and Reinvestment Act. In total, about 800 BAB issues have been sold to date under the program, which offers issuers an interest subsidy of 35% from the U.S. Treasury Department.
The Pennsylvania transaction includes $295.8 million of tax-exempt Series A bonds that mature from 2011 through 2019 and $604 million of taxable Series B BABs maturing from 2020 through 2030, according to the preliminary official statement.
The commonwealth will offer both the tax-exempt bonds and the taxable debt at the same time on Wednesday at 11 a.m. Eastern Standard Time. Dreher said that sometimes issuers have sold both types of securities on the same day, but at different times.
“It’s an all-or-none bid so it’s combining the tax-exempt and the taxables,” Dreher said. “If there were two separate series, you would be dealing with buyers on the taxable side that really haven’t looked at the commonwealth’s credit, but since we’re combining this with the tax-exempt, you’ve got those same sets of underwriters that are used to the commonwealth’s paper, making this deal with their folks internally.”
Obermayer Rebmann Maxwell & Hippel LLP is bond counsel. Public Financial Management, Inc. is the financial adviser.
Fitch Ratings and Standard & Poor’s rate the commonwealth AA with stable outlooks. Moody’s Investors Service rates the credit an equivalent Aa2, but with a negative outlook.
While the transaction includes a sizeable portion of BABs that will price competitively, Matt Fabian, managing director at Municipal Market Advisors, said the credit should do well this week.
“They clearly have their budget issues, but it’s not like Illinois,” Fabian said. “Yields are still very low. Long-term, high-grade, tax-exempt yields are very low and BAB spreads are very tight, so it’s a great time for Pennsylvania to be in the market, for sure.”
Of the bond proceeds, $580 million will help finance construction and major rehabilitation of public buildings, $170 million will go towards transportation infrastructure, and $100 million will support redevelopment assistance projects, according to the POS.
Another $50 million will help fund open space and farmland preservation, watershed protection, and abandoned mine reclamation, among other capital projects.
The state currently has several major infrastructure developments, such as a $700 million expansion of the Pennsylvania Convention Center in Philadelphia, a $150 million food distribution center in Philadelphia’s port, and construction of four state prisons that cost roughly $200 million each, Dreher said.
The state has total bonding capacity in fiscal 2010 of $1.9 billion and officials plan to sell an additional $600 million to $1 billion of new-money bonds again in late May or early June. That transaction may include BABs, depending upon the market.
“I would venture to say we’re going to be between $1.5 billion and $1.9 billion [in fiscal 2010], so this is approximately half of the fiscal year issuance,” Dreher said. “We just have several very large projects that are in the midst of full construction.”
One fiscal challenge for the state is annual pension payments that are set to increase by $1 billion to $1.2 billion each year, beginning in fiscal 2013. Officials anticipate that Gov. Edward Rendell’s upcoming fiscal 2011 budget will include proposals to begin addressing that issue in the next fiscal year. Rendell will deliver his budget address on Feb. 9.
“I would imagine a plan would look at redesigning pension options for employees or all new employees,” Dreher said. “So I would imagine any approach that the governor would put forward would try to revise our pension programs in such a way as to help mitigate the pension contribution cliff that’s coming in” fiscal 2013.
He expects to include a new pension actuarial valuation in the state’s next bond sale in late May or early June. The current report is as of June 30, 2008.
As with other states, Pennsylvania must address how it will adjust to reduced federal stimulus funds, which will begin to taper off in fiscal 2011. The state received $2.5 billion of stimulus funds in fiscal 2010 but that amount will decrease to $1 billion next year.
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