When Massachusetts issued its first-ever taxable general obligation Build America Bond deal in December it did so in a negotiated transaction and paid a premium to Treasuries of 120 basis points for 30-year debt.
That $956.4 million deal, which had a true interest cost of 3.57%, was followed by a $450 million competitive BAB sale in May. The commonwealth used an outside financial adviser, Siebert Brandford Shank & Co. The true interest cost was 3.17%.
Last week's $358 million BAB sale — also via competitive bid — did not have an outside financial consultant. The deal came with a TIC of 2.95% and an 80 basis point premium versus comparable Treasury bonds for bonds maturing in 2031.
Market observers say the sales reflect not only the recent rally in bond prices but also an increased comfort level among investors with BABs, especially for state-level issues.
Massachusetts in December used Goldman, Sachs & Co. and Barclays Capital as joint book-runners. There was no outside financial adviser. The sale offered two term bonds that priced at par: $200 million due 2030 that priced with a 5.3% coupon and $756.4 million that priced with a 5.46% coupon. The 2030 bonds priced 105 basis points over Treasuries, while the 2039 bonds priced 120 basis points over Treasuries. The deal was upsized from the originally planned $500 million.
In the May 5 competitive deal, the GO BABs also priced at par, with Morgan Stanley as the winning bidder. Serial bonds maturing in 2024 priced with a 4.48% coupon and increased annually by 10 basis points to 4.68% for debt maturing in 2026. Another serial bond maturing in 2027 priced with a 4.76% coupon. A $300 million term bond maturing in 2029 priced with a 4.91% coupon.
The 2024 bonds priced 92 basis points above Treasuries while the 2025 and 2026 BABs priced 102 basis points and 112 basis points, respectively, above Treasury bonds, according to Bloomberg LP. Debt maturing in 2027 and the 2029 term bond priced 37 basis points and 52 basis points above Treasuries maturing in 2040.
The May deal "was priced extremely aggressively," said Peter Demirali, managing director at Cumberland Advisors Inc. "But this time they came more in line with other gilt-edged deals that came recently."
Massachusetts on Wednesday sold $358 million of GO BABs that mature in 2031 with a 4.5% coupon that priced at par. The deal was 80 basis points above Treasuries.
Citi grabbed most of Wednesday's deal, $312.1 million, while Fidelity Capital Markets and Loop Capital Markets purchased $25 million and $10 million, respectively, according to Thomson Reuters data.
The Bay State has been a frequent and recognizable issuer in the market, offering eight different transactions since January 2009. Moody's Investors Service rates the state Aa2, while Standard & Poor's and Fitch Ratings assign their AA and AA-plus ratings to the commonwealth.
"Spreads have definitely continued to keep pace with Treasuries here, at least in the quality names," Demirali said. "Some of the lower-quality names widened out a little bit, but it's not as though they're going in the opposite direction. They're just either keeping up with or slightly lagging the rally in long Treasuries."
Demirali said Cumberland Advisors did not participate in last week's deal as the firm prefers to buy bonds that offer more of a spread, but many portfolios look for a strong credit rather than higher yield.
"For those accounts that really need high-quality names in their portfolio, it's a good one to have there," Demirali said.
Tom Kozlik, municipal credit analyst at Janney Capital Markets, said Massachusetts benefited from increased demand for BABs during the past few weeks, which has tightened spreads between BABs and U.S. Treasury bonds. There was less interest in June and through part of July for BAB transactions due to certain "economic scares" during that time, he said.
"For the past three or four weeks, demand has been strong and this is a good example of that," Kozlik said. "I think the plus-80 is about where this credit should be pricing — if not a little aggressive, to tell you the truth, that far out. So it looks like Massachusetts got a good pricing on this competitive issue."
Overall, the state aims to keep an open dialogue directly with the investment community.
"We think it's a big part of our job to talk to investors and make ourselves available to talk to investors about the credit, about a particular sale, and about structures," said Colin MacNaught, assistant treasurer for debt management. "It requires some time, but we want investors to know that we're available and if they have a question and they want to speak to us directly, then we're definitely available at the time of a sale or away from a particular sale."
MacNaught said the state tries to use the Build America Bond program as efficiently as possible.
"Because the program works very well on the long end, we've used BABs as a way to efficiently finance the state's long borrowing needs over the next three or five years," he said. "In [last week's] sale, we were able to borrow approximately $350 million for 20 years at a cost of capital of 2.95%. It's extremely beneficial to have the ability to borrow in the much larger taxable bond market using BABs."
The Massachusetts Treasury Department declined to discuss its strategy when it comes to selling BABs through negotiation versus competitive bidding or when it believes it's appropriate to use an outside financial adviser. Treasury officials are currently reviewing submissions from financial advisers in response to the department's request for qualifications that it released in May.
Kozlik said that typically, state-level GO credits have an easier time presenting themselves to investors in comparison to more complicated credits such as student loan or housing deals. That gives state GO bond deals the ability to be issued through competitive bid and allows a deal to be structured without a financial adviser.
"For every extra explanation that you have to give, the more difficult it becomes to sell the bonds," Kozlik said.
