Gilt-edged Delaware this week will sell nearly $300 million of general obligation debt, including $175.2 million of taxable Build America Bonds and qualified school construction bonds to help finance capital projects.
The transaction includes $40 million of tax-exempt debt for an advance refunding, but market conditions will dictate whether the state will issue those bonds.
JPMorgan will kick off one day of retail orders on Tuesday for $123.4 million of tax-exempt Series 2010B bonds followed by institutional pricing on Wednesday, said Stephanie Scola, Delaware’s director of bond finance.
The state will then offer $115.7 million of Series 2010C BABs and $59.5 million of Series 2010D QSCBs via competitive bid on Thursday.
Saul Ewing LLP is bond counsel. Public Financial Management Inc. is the financial adviser.
Fitch Ratings, Standard & Poor’s and Moody’s Investors Service all rate the bonds triple-A with a stable outlook.
Delaware has $2.28 billion of outstanding net tax-supported debt, according to Moody’s. It does not have any variable-rate debt or derivatives.
Other triple-A states recently have sold GO debt through tax-exempt bonds and BABs. On Oct. 13 Citi was the winning bidder on $171.2 million of Virginia BABs and tax-exempt bonds.
Serial maturities ranged from 2011 through 2026, with term bonds maturing in 2030 and 2040.
Debt maturing in 2011 to 2015 was offered as tax-exempt bonds.
Of the bonds that were reoffered, yields ranged from 2.09% on a 2.1% coupon for bonds maturing in 2016 to 3.16% on a 3.15% coupon for debt maturing in 2021, according to Municipal Market Data.
In addition, Utah sold $412.9 million of tax-exempt GOs and $621.9 million of BABs on Sept. 23 with Goldman Sachs & Co. as book-runner. The tax-exempt bonds priced with debt maturing from 2011 through 2017.
Yields ranged from 0.24% with a 4% coupon in 2011 to 1.73% on a 4% coupon in 2017, according to the official statement.
The BABs priced with three serial maturities pricing at par in 2019, 2020, and 2021 with rates of 3.18%, 3.28%, and 3.36%, respectively. A $388.2 million, 2025 term bond priced at par at 3.53%.
Delaware can sell debt with maximum maturities of 20 years and prefers to pay off the bulk of its debt within 10 years. The tax-exempt Series 2010B bonds include serial maturities from 2011 through 2024, with larger principal payments from 2011 through 2018, according to the preliminary official statement.
Of the tax-exempt portion, officials may use $40 million to advance refund prior debt and another $84.2 million to help finance infrastructure developments. Scola said the state plans to sell those tax-exempt new-money bonds instead of using taxable BABs in order to keep shorter maturities.
While BABs offer issuers a 35% federal subsidy on interest costs, those securities tend to price on the longer end of the curve.
“We don’t want to push the debt out or amortize it for longer than we have to,” Scola said. “We’re trying to keep a conservative debt portfolio and not have too much maturing in the out years.”
She added that once the tax-exempt and taxable bonds price, Delaware will still have 70% of its debt maturing within 10 years.
As for the $40 million of advance refunding, officials will monitor the market to see if that transaction is cost-effective. Delaware aims to grab at least 4% net-present-value savings on the refunding. If not, the state will terminate or postpone that refinancing.
Potential refunding candidates include Series 2004A bonds and Series 2005A and B bonds, according to the POS.
“It’s not necessary that we refund these,” Scola said. “So if we fall below 4% we very well may pull the refunding or pull the individual maturities.”
Georgia, which also carries triple-A ratings, postponed $321 million of refunding debt on Oct. 5 as the deal did not generate the state’s minimum 4% net-present-value savings requirement. Pennsylvania also postponed a $386.5 million refunding deal on Oct. 5. The Keystone state carries double-A ratings.
Even gilt-edged states have to deal with negative arbitrage as low Treasury yields may not offer municipal issuers enough return, even though states and local governments are taking advantage of low borrowing rates.
“Certainly low rates help with refinancing,” said Alan Schankel, director of fixed-income research at Janney Capital Markets. “On the other hand, Treasury rates are pretty low too and it’s a two-part puzzle. You have to be able to make money on the escrow part of the account, which is Treasuries. I think the pace of [advanced] refundings has slowed a little bit lately.”
The taxable Series 2010C BABs include serial maturities from 2019 through 2030, with $10.5 million of debt maturing each year. The Series 2010D QSCBs have a single bullet maturity in 2029, according to the POS.
The $59.5 million of QSCBs reflect Delaware’s 2009 and 2010 bonding allocation from the federal government, which pays 100% of the interest costs on the taxable bonds.
Scola said she does not anticipate the state selling new-money again until fiscal 2012, which begins July 1.
While the BAB program is set to expire on Dec. 31, Congress could extend the program with the 35% subsidy or a lower subsidy rate.
Some municipal borrowers may rush to take advantage of the 35% BAB subsidy before the end of 2010, but Scola said Delaware would probably not join in a potential last-minute rush.
“We might increase the Build America Bond issue in this series, depending on where rates are and whether or not the benefit is on the taxable side or the tax-exempt side,” she said.
“It could also be reduced for the same reason. I think we’re happy with how our proceeds are going to take us into the next calendar year and to the end of this fiscal year,” Scola said. “So I would hesitate to issue debt simply because it was cheap. So no, I think this will be it for Delaware in 2010.”
Most of the bond proceeds will help finance school construction projects. Other developments include a new court house in Kent County and construction of several new libraries throughout the state, Scola said.
The state hasn’t had much BAB activity. It sold $179.3 million of BABs in October 2009. In 2010, The Delaware Solid Waste Authority sold $18.8 million of BABs in June while the town of Middletown in northern Delaware sold $13.6 million earlier this month.
In addition, both Schankel and John Mousseau, portfolio manager at Cumberland Advisors, said that the deal should benefit from Delaware’s lack of robust municipal issuance.
“With Delaware you’re at the higher end of the pecking order,” Mousseau said. “When you boil it down, they’re going to come and they’re going to find a willing audience.”
