CHICAGO — Ohio Tuesday will take retail orders for $582 million of refunding bonds to achieve lower interest costs over the next eight years.
The state will open the deal up to institutional buyers Wednesday.
“The municipal rates are very low and there’s a lot of negative arbitrage in our escrow, but still, with the low interest rates, the net present-value savings are hovering in a range of 8% to 10%,” said Larry Scurlock, the state’s assistant debt manager.
After this transaction Ohio will have refunded a total of about $1.3 billion since 2009. In addition to refundings for present-value savings, the state has restructured $736 million of bonds in four transactions throughout 2009 and 2010 as part of the fiscal 2010-2011 budget. The restructuring achieved budget relief largely by pushing off debt maturities coming due to later years.
“We are a large and frequent issuer, and given the historic drop in interest rates over the last couple of months, this isn’t unusual,” Scurlock said.
Ohio has a total of $9.5 billion in outstanding debt, which includes roughly $6.9 billion of general obligation bonds.
From the investor side, the state is viewed as struggling but remains a strong credit, according to one investor who buys Ohio debt.
“They’ve had their struggles, but it seems to me the environment is a little better than before, and they are obviously doing everything they can to saving interest on all their outstanding debt,” said Patrick Morrissey, director of fixed-income at Wayne Hummer Asset Management in Chicago.
“I think the deal will be well-received,” he said. “It will be priced to go. Especially on the big deals, no one wants to be hanging onto too much inventory now, but in this interest-rate environment, it will still be a net savings for the state.”
The Ohio Public Facilities Commission will issue the debt, which will advance refund four series of GO bonds. All the refunded debt features call dates that are at least two years away.
The transaction includes $178 million of higher education bonds, $330 of common schools bonds, $47 million of infrastructure improvement bonds, and $27 million of conservation projects bonds.
JPMorgan is senior manager and KeyBanc Capital Markets Inc. is co-senior. Ten additional firms round out the underwriting team. Bricker & Eckler LLP and Haynes & Haynes LLC are co-bond counsel. Public Financial Management Inc. is financial adviser.
The big three rating agencies affirmed their Ohio GO ratings ahead of the sale.
Both Standard & Poor’s, which rates the state AA-plus, and Moody’s Investors Service, which rates it Aa1, maintain a negative outlook on the state due largely to fiscal pressure. Fitch Ratings gives Ohio a AA-plus with a stable outlook.
Credit analysts praise the state for strong fiscal management that has allowed it to maintain fund balances and — until last year — a rainy-day fund, despite the recession and deterioration in the manufacturing sector. The current budget, however, relies on a number of one-time revenue measures.
“The negative outlook reflects our view of Ohio’s substantially diminished flexibility following the depletion of the budget stabilization reserve and on account of the ongoing use of general and other state reserves,” Standard & Poor’s analyst Robin Prunty wrote in a release on the upcoming borrowing.
Meanwhile, the Ohio treasurer’s office next week will price $209 million of highway capital improvement bonds. The debt is tentatively structured into three series, including $145 million of taxable Build America Bonds, $30.2 million of tax-exempt bonds, and $33.2 million of tax-exempt refunding bonds.
Rice Financial Products is managing the sale.
Proceeds from the new-money piece of the sale will finance highway projects across the state. The refunding is for savings.
