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Oregon Places Bet On Lottery Bonds

SAN FRANCISCO — Oregon will march to market next week with its largest sale so far this year, a deal that is part of a broader buttoned-downed strategy.

The sale of $183 million of lottery revenue bonds — $131 million of tax-exempt paper, $27 million of refunding debt, and $25 million of taxable bonds — is part of a larger plan to level out debt-service payments and to clear the way for near-term bonding capacity, despite the weak market.

“We are working on creating a more leveled structure across the whole bond program,” said Laura Lockwood-McCall, debt manager for the state treasurer’s office. “If we miss the market one time we will get the market next time and refund it at a better rate.”

The State Debt Policy Advisory Commission, chaired by Treasurer Ted Wheeler, has said Oregon needs to refrain from selling general obligation bonds backed by the general fund in the next two-year budget cycle because an estimated sharp falloff in revenue will likely push the state above its historic target of debt-service costs equaling less than 5% of general fund revenues.

In Oregon, the governor and Legislative Assembly decide debt capacity. The commission forecast that debt capacity will return to $500 million a year in subsequent budget cycles.

Oregon had $4.5 billion of outstanding GO debt as of June 30.

Gov. John Kitzhaber has proposed a combined bond-issuance authority ceiling for GO and revenue bonds of $4.69 billion in the 2011-13 biennium — $1.46 billion of GOs and $3.23 billion of revenue bonds.

Most of the GOs would be double-barreled, or backed by revenue sources other than the general fund.

The commission’s report said the state could free up $282 million of additional debt capacity for the next biennium by restructuring lottery debt.

Without refinancing, the state’s Treasury Department projects just $9.4 million in lottery-backed debt capacity will be available in the next biennium. The state had $1.1 billion of outstanding lottery debt as of June 30.

The sale is also a component of the state’s bond calendar that is nearing the end of its two-year budget cycle on June 30, which is part of the reason why the debt is being sold in a weaker market.

“We typically hit a lot of singles and doubles and not too many home runs,” said Lockwood-McCall. “We tend to issue a fairly significant chunk of our entire portion of authorized bonds towards the end of the biennium, and we are at the end of that biennium.”

The state also issued about two years worth of debt last year as it took advantage of the Build America Bond program, mostly for the Oregon Department of Transportation.

Lockwood-McCall said two fairly sizeable general obligation deals — authorized to be sold as GOs instead of certificates of participation by voters in November — are upcoming in the next few months.

Despite the down market, she said the most recent offering still comes at a somewhat opportune time as the state just had its GO bond rating upgraded by Standard & Poor’s to AA-plus from AA as a result of its tighter budget controls.

Moody’s Investors Service assigns the state’s GOs a Aa1 rating. Fitch Ratings rates them an equivalent AA-plus.

“When the upgrade came out we were pleased and slightly astonished,” ­Lockwood-McCall said. “I think the larger bad press has kept retail out of the Oregon market.”

The state’s lottery revenue bonds being sold for the Department of Administrative Services hold a AAA rating from Standard & Poor’s, which was affirmed during the recent upgrade, and a Aa2 rating from Moody’s.

Jack Kenny, finance manager in the department, said the high rating should help the sale.

“I think we will do well. It is a highly rated issue,” Kenny said. “Oregon is a specialty state and there hasn’t been anything recently of this size, so I think there will be a good appetite.”

He noted that the lottery bonds carry good credit features, including four-times debt service coverage and prepayment at the beginning of the year on annual debt service.

But market interest will likely depend on the yield that Oregon offers, according to Alexander Anderson, a portfolio manager with Envision Capital Management in Los Angeles.

“AAA-rated paper is the kind of stuff that a lot of institutional buyers are interested in,” Anderson said. “I am sure they will see a decent market reception as long as it is priced attractively enough.”

The bonds are likely to sell to retail on Tuesday and institutions the next day.  Morgan Stanley is the lead manager on the issue.

Kenny said Wednesday the final structure of the sale is still being worked out with the bankers.

The money raised from the debt offering will be used primarily for refunding and various economic development projects, including $100 million for non-highway, multi-modal transportation infrastructure projects.

K&L Gates LLP is bond counsel on the deal.

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