Washington Plans Record Sale: $1.1B of GO BABs

ALAMEDA, Calif. — Washington plans to bring its largest-ever bond sale to market Tuesday, when it is scheduled to price $1.1 billion of motor vehicle fuel-tax general obligation bonds.

The taxable Build America Bond deal will be only the second negotiated offering the Washington treasurer’s office has run since 1996. The state’s first BAB deal, a $500 million sale last year, was the other.

JPMorgan and Bank of America Merrill Lynch are the joint book-runners. The BABs will give the state a 35% federal subsidy for its taxable interest payments.

The bonds carry a double-barreled backing — in addition to Washington’s full faith and credit, they carry the first call on revenue from the state’s 37.5-cent per-gallon fuel tax. The proceeds will finance transportation projects.

Treasurer James McIntire said the issuance comes in time to fund a heavy summer construction season, and also offers the state a chance to reach the market while rates are favorable and before a possible end-of-year rush.

Authority for the BAB program — which offers a subsidy on taxable interest payments by issuers for debt that would otherwise qualify as tax-exempt — expires at the end of 2010, and congressional talk of renewing the program indicates that subsidies may be lower than the current 35%.

“We think this is a great opportunity,” McIntire said. “We’d like to do it now rather than string it out over the rest of the years and have a lot of people jump into the Build America Bonds market at the end of the year.”

The deal is tentatively expected to include serial maturities from 2016 to 2024, and term bonds in 2031 and 2040 maturities, deputy treasurer Ellen Evans said in a recorded investor presentation.

It will be the fourth-largest BAB deal of the year, according to Thomson Reuters, and the highest-rated of this year’s billion-dollar-plus deals.

Washington brings double-A-plus ratings across the board, following Fitch Ratings’ recent recalibration. Moody’s Investors Service’s recalibration did not change Washington’s Aa1 rating.

“Washington’s rating outlook is stable, reflecting Moody’s expectation that the state’s finances will remain well-managed despite its recent sizeable budget shortfalls, although uncertainty surrounding the timing and strength of the economic recovery could pose additional budget challenges,” the agency said in its rating affirmation last week.

“Given the substantial use of one-time actions to balance budget gaps thus far, Washington’s reserve levels will likely remain slim over the near term,” it said. “In addition, considerable out-year structural gaps will likely be challenging to resolve.”

But the state benefits from institutionalized, conservative budget controls and a strong liquidity position, Moody’s noted.

“The state demonstrated impressive financial flexibility through the 2001 recession as it accommodated resulting economic and revenue swings and has shown a willingness to curtail spending during this economic cycle,” the report said.

Washington has thus far only offered its double-barreled fuel tax bonds as BABs.

Because they have a dedicated repayment source, the BABs — unlike the state’s various-purpose GO bonds — are not subject to Washington’s constitutional debt limit. The state has shied away from issuing its various-purpose GOs as BABs, because the full taxable interest rate would count against the debt limit.

That could change. At McIntire’s urging, this year lawmakers approved a constitutional amendment to amend the state’s debt-limit language to calculate the limit using the net interest rate on outstanding bonds, after the federal subsidy, rather than the gross interest rate. Voters will decide on the amendment in November.

“That could save us as much as $100 million for the next biennium’s capital budget  — that’s good,” he said. “That does anticipate that the Build America Bonds program will be re-enacted and extended.”

As it stands now, the treasurer’s office is planning to sell about $1.1 billion of tax-exempt various-purpose GOs during the next fiscal year, which begins July 1.

It is also planning to sell about $110 million of traditional taxable GOs, without the BAB subsidy, and about $220 million of tax-exempt gas tax GO bonds.

“We anticipate doing a relatively small issue of tax-exempt gas tax bonds in the next fiscal year in shorter maturities so we end up with level debt service again,” Evans said in the investor presentation.

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