Massachusetts Wednesday will sell its first-ever Commonwealth Transportation Fund bond offering — $576.2 million of taxable debt to repair decrepit bridges.
The triple-A rated transaction will include a blend of Build America Bonds and more than $150 million of taxable Recovery Zone Economic Development Bonds. The special obligation bonds are secured by revenue from the state’s 21-cent gas tax and registrar of motor vehicle fees.
The state earlier in the week will be in the market with about $500 million of federal highway grant anticipation debt to help fund its bridge repair program and refund some outstanding debt.
High debt-service coverage on the bonds helped snag gilt-edged ratings from Moody’s Investors Service and Standard & Poor’s. The top-notch ratings make the CTF credit a higher-rated issuer than Massachusetts, which carries double-A ratings on its $17 billion of outstanding debt.
Bond and note proceeds will help finance Massachusetts’ accelerated bridge program, which will upgrade and in some cases replace structurally deficient bridges throughout the state.
JPMorgan will price the bonds Wednesday. Edwards, Angell Palmer & Dodge LLP is bond counsel. There is no outside financial adviser. The Series 2010A revenue bonds include $21.7 million and $22.5 million of serial debt maturing in 2024 and 2025, respectively, according to the preliminary official statement. The transaction also includes two term bonds, with $132 million and $400 million of debt maturing in 2030 and 2040.
Both BABs and RZEDBs offer issuers a federal subsidy on interest costs. BABs include a 35% subsidy while RZEDBs offer a 45% subsidy to borrowers. Both stimulus programs will end by Dec. 31 unless Congress extends them.
Like many issuers, Massachusetts is looking to utilize the BAB and RZEDB programs before they expire. States and local governments have achieved lower borrowing costs, especially on the long end, by selling such taxable securities rather than issuing traditional tax-exempt.
Issuers tend to sell more during the end of a calendar year, but the rush to sell BABs and other securities that offer a federal subsidy has increased supply in the municipal bond market even more.
CTF’s revenue structure and its triple-A ratings will help it stand-out in the crowd of issuers, said Peter Demirali, managing director and portfolio manager at Cumberland Advisers.
“It’s more like the other credits are going to be fighting it,” Demirali said. “There’s not much that you really have to fight for when you’re rated triple-triple. It’s more like people have to make room for you. It’s our view that a credit like this is going to do extremely well … in our view it’s going to trade creamy.”
He noted that Cumberland is interested in this deal, whether lawmakers extend the BAB program or not.
Utah, rated triple-A by all three rating agencies, priced $621.9 million of BABs on Sept. 24, with debt maturing in 2019, 2020, 2021, and 2025. The 2019, 2020, and 2021 bonds priced 65, 75, and 83 basis points, respectively, over 10-year Treasuries, according to Thomson Reuters. Debt maturing in 2025 priced 100 basis points over Treasuries.
Massachusetts has sold general obligation BABs in four separate deals. The new special-obligation credit offers buyers a revenue repayment structure, which tends to appeal to BAB investors that are used to evaluating corporate debt. The credit’s high debt-service coverage is also an attractive quality.
“For domestic taxable buyers, they prefer, as a general tendency, bonds with specified revenue sources, high coverage, and high status, first-lien status, typically,” said Chris Mier, managing director and strategist at Loop Capital Markets. “So this credit has a lot of great things going for it.”
In addition, the $400 million of term bonds maturing in 2040 are eligible to be included in the Barclays Capital U.S. Long Credit Index. That makes the bonds more attractive to investors looking for maximum liquidity.
“The buyers of these BABs like there to be index eligibility because they feel that there’s ongoing interest in the bonds,” Mier said. “Some investors will try to shade their portfolio relative to the index. So they may have an active need for 30-year index-eligible bonds because they’re trying to either match the index or be slightly different in one way or another.”
Massachusetts’ Treasury Department, which executes the commonwealth’s debt transactions, anticipates the deal structure will offer a lower cost of borrowing.
“We understand that investor liquidity is really important,” said Colin MacNaught, assistant treasurer for debt management. “And we want to structure our bonds to achieve the best price possible for Massachusetts taxpayers and we understanding liquidity for investors is a big part of that.”
Of the state’s $350 million 2010E BAB deal that priced on Nov. 23 with all debt maturing in 2021, State Street Global Advisors held $100 million of the bonds as of Dec. 6, according to Bloomberg LP.
Buyers of Massachusetts’ $358 million Series 2010D BABs include Blackrock Fund Advisors, which held $575 million as of Nov. 30, and Vanguard Group Inc., which held $500 million as of Sept. 30, according to Bloomberg LP. Country Capital Management Co. and Northern Trust Corp. each had $250 million as of Oct. 29 and Sept. 30, respectively. The Series 2010D is a one-term bond maturing in 2031. It priced on Aug. 18.
The state already has $413.9 million of outstanding gas-tax bonds sold under a 1994 lien. The first 6 cents of the 21-cent gas tax pays down those outstanding bonds, which have a final maturity of 2023. That lien will close once Massachusetts sells the Series 2010A bonds.
Once debt-service costs are met on the outstanding 1994 lien gas-tax bonds, the CTF credit is projected to have $1.07 billion of pledged revenue in fiscal 2011, according to the POS. Fiscal 2011 began July 1. That amount will increase gradually to $1.13 billion in each year from fiscal 2024 through fiscal 2040. Projected debt-service coverage ranges from a high 73.5 times in fiscal 2011 to a low 21.3 times in fiscal 2040. While those coverage levels are high, the rating agencies noted that the CTF indenture mandates that pledged revenues must equal four times maximum annual debt service.
“In order to issue additional bonds, they have to meet a test that revenues in 12 of the prior 18 months equal at least four times projected maximum annual debt service, which is very strong and is the key component of bondholder protection in this structure,” said Moody’s analyst Nick Samuels.
Prior to the CTF deal, Massachusetts Monday will issue $390 million of senior-lien refunding notes secured by payments from the federal highway grant anticipation note program. Officials anticipate the refunding will generate more than $10 million of net present-value savings. Once the refunding prices, the state will close that senior lien.
On Tuesday, the state will sell $100 million of new-money subordinate Gans that will help finance the Accelerated Bridge Program. Officials will issue the subordinate Gans as a new lien. It is backed by the federal payments and excess CTF funds.
Standard & Poor’s rates the senior-lien Gans AA-plus, but anticipates upgrading the credit to AAA once the lien is closed. The agencyon Nov. 30 assigned the subordinate lien an initial AAA rating. Fitch last week upgraded the senior-lien to AA-plus from AA and assigned an AA-plus rating to the subordinate credit. Moody’s last week upgraded the senior-lien Gans to Aa1 from Aa2 and assigned an initial rating of Aa2 to the subordinate Gans.
The subordinate Gans and the CTF bonds will help pay over eight years for repairs and upgrades to more than 200 structurally deficient bridges. The program includes bridge replacements and a handful of larger-size projects that will cost about $300 million each.
