Deal in Focus

Triple-A Tennessee Readies GOs

BRADENTON, Fla. — Tennessee will bring its fourth deal in six weeks to market on Wednesday with the competitive sale of $213.3 million of tax-exempt general obligation bonds.

For investors searching for highly rated paper, the offering is the only GO sale of the year for the gilt-edged state.

Of the proceeds, $169.5 million of tax-exempt Series A bonds will take out commercial paper used to fund various capital projects, including  higher education and economic development.

Another $43.7 million will be taxable Series B refunding bonds being sold for interest savings within existing ­maturities.

Electronic bids will be taken through BiDCOMP/Parity, starting at 9:30 a.m. Central Daylight Time for the Series A bonds and 10 a.m. for the B bonds.

The offering is structured to provide level debt service, with the Series A bonds having maturities between 2010 and 2031. Bidders can designate term bonds between 2019 and 2031.

The refunding bonds, maturing in 2012 and 2019 through 2023, are expected to result in net present-value savings of $4.6 million, or 8.5%, depending on market conditions. The refunding must result in a minimum of 4% PVS for the refunding bonds to be sold.

The Tennessee State School Bond Authority has sold two issues and the Tennessee Housing Development Agency has sold one deal since Sept. 1.

The state’s only GO issue in 2010 is expected to price as well as the recent sales brought by other state agencies, according to Mary-Margaret Collier, director of the Office of State and Local Finance.

Except for selling qualified school construction bonds in a statewide pool program, Tennessee will end the year without taking advantage of taxable Build America Bonds offered over the last two years by Congress as part of the federal stimulus act.

The current authorization for BABs expires at the end of the year, though several extender bills have been filed.

“We examined the option and it was going to be a long time before we could take advantage of that,” Collier said. “If BABs are extended … we might consider it.”

BABs don’t fit with the way Tennessee’s debt program is structured and its amortization policy, said Sandi Thompson, assistant director of State and Local Finance.

“The state issues commercial paper to initially fund capital projects,” Thompson said. “We don’t issue long-term debt [up front] to fund capital.”

The projects being financed in next week’s offering were in the works before BABs — authorized as part of the federal stimulus effort — were available. So the projects would not qualify for BAB funding, she said.

Tennessee uses a $350 million commercial paper program for up-front project costs.

The CP can remain outstanding up to 270 days before it is taken out with long-term, fixed-rate debt.

As of Sept. 30, $310 million of commercial paper was outstanding under the program.

Another factor in whether to use BABs is the state’s policy to amortize GO debt within 20 years.

Since most BABs are issued with maturities longer than 20 years, Collier said few of the state’s GO bonds would benefit from being sold as BABs.

The bonds being sold next week are rated triple-A by Fitch Ratings and Moody’s Investors Service and AA-plus by Standard & Poor’s.

All three agencies affirmed their ratings on about $1.5 billion of outstanding state GO bonds and assigned stable outlooks.

Analysts cited Tennessee’s financial management through the difficult recession, maintenance of reserves, low debt levels, and a long-held practice of funding annual required pension contributions. State pension funding was at 91% as of July 1, 2009.

“The state’s AAA GO rating reflects its low debt level, among the lowest of any state, and an ongoing commitment to structural balance,” said a report by Fitch analyst Douglas Offerman.

“Conservative fiscal management has been in evidence repeatedly in this decade, including in its proactive approach to addressing the fiscal impact of the recession.”

Tennessee does not have an income tax and relies heavily on sales taxes. Collections were sharply lower in fiscal 2009 and fiscal 2010, Offerman said.

“The state has closed gaps arising from weak revenue collections through fiscal 2010 and in the enacted fiscal 2011 budget by reliance on spending cuts, federal stimulus aid, and reserve draws,” he said. “Reserve balances, while lower, remain a source of flexibility and the state expects to return to structural balance by fiscal 2012.”

Fiscal 2010 ended with a fund balance of $276 million and with reserve balances of $887 million.

Standard & Poor’s analyst Theodore Chapman noted that Tennessee has suffered from the recession and a loss of jobs, particularly in manufacturing, but the state’s economy “has the potential to remain resilient despite still-soft U.S. economic conditions.”

The state’s unemployment rate was 9.6% in August, matching the national rate.

However, Chapman said there are signs of improvement.

“The sluggish manufacturing sector got a major boost in July 2008 when Volkswagen Group of America selected a site in Chattanooga to construct a $1 billion assembly plant that will directly employ about 2,000 people by 2011,” he said.

Other recent projects include Nissan’s announcement in July 2009 to do more than $1 billion of upgrades to its Smyrna facility to produce electric hybrid cars and two large photovoltaic solar-energy projects that will soon come on line with 1,000 new jobs.

Chapman said the stable outlook on the state’s GO debt reflects sound reserve levels and proactive cost-containment measures that, along with federal stimulus funds, would allow Tennessee to maintain its financial profile in the coming years.

The state’s financial adviser is Public Financial Management Inc. Hawkins Delafield & Wood LLP is bond counsel.

In other recent state agency sales, the Tennessee State School Bond Authority sold $212.4 million of QSCBs on Sept. 22 as the final tranche of the state’s federal allocation.

The authority also sold $245 million of higher education program bonds on Sept. 1.

The Tennessee Housing Development Agency sold $120.7 million of homeownership program bonds on Sept. 23.



Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.