Massachusetts will sell $490 million of new-money general obligation debt Tuesday as the state looks to broaden its retail investor base.
The Series 2011B and Series 2011C bonds are the final component of the commonwealth’s $1.62 billion borrowing plan for fiscal 2011, which ends June 30. The tax-exempt bonds were initially priced for retail Friday with yields ranging from 0.52% to 3.61% and maturities ranging from 2012 to 2025.
The proceeds will help finance ongoing infrastructure projects, including roadway, bridge, and mass-transit upgrades, improvements at colleges and universities, housing development, and other capital needs.
JPMorgan will price the bonds on Tuesday after the two-day retail order period on Friday and Monday. Nixon Peabody LLP is bond counsel.
While the Series 2011B serial bonds will have denominations of $5,000, the zero-coupon Series 2011C bonds will have denominations of $1,000.
This is the first time since 1990 that Massachusetts is issuing debt with denominations below $5,000, according to Treasurer Steven Grossman. Officials anticipate the lower denominations will attract more retail investors to the transaction.
“We want to create a whole new class of investors, younger investors, people who may not have $5,000 but who — if they get in the habit of buying Massachusetts municipal securities — will continue to buy them as they get older and as they develop some wealth,” Grossman said last week in an interview with The Bond Buyer.
Moody’s Investors Service rates the Series 2011B and 2011C bonds Aa1 with a stable outlook. Fitch Ratings rates them AA-plus. Standard & Poor’s rates Massachusetts’s GOs AA.
Standard & Poor’s in early February revised the state’s outlook to positive from stable, due to strong management practices and improving finances.
The Series 2011B bonds for $485 million offer serial maturities from 2012 through 2025, with $45 million maturing annually from 2012 through 2018 and $25 million maturing each year from 2019 through 2025, according to the preliminary official statement.
The $5 million of Series 2011C “Build Mass Bonds” are capital appreciation bonds that mature in 2014.
Issuers have been looking to grab retail investor attention to offset reduced interest in munis on the part of some institutional investors and as municipal bond funds have been hemorrhaging cash.
While funds continue to lose investors, outflows fell to only $95 million in the week ended May 11. Investors pulled another $108 million out in the week ending May 18, according to Lipper FMI. That compares to the $681 million four-week average since mid-November.
Matt Fabian, managing director of Municipal Market Advisors, said issuers should consider lowering bond denominations in order to bring in more local buyers.
“It broadens the potential demand base,” Fabian wrote in an e-mail. “And by selling more bonds to local residents, it creates a stronger, more proprietary relationship between the state and its citizens. In a market like this where demand is inconsistent, more states and locals should be at least experimenting with this structure.”
Grossman, a Democrat who took office in January after winning election in November, and fellow Democrat Gov. Deval Patrick are working together to educate bondholders and Massachusetts residents about the sale. They held an investor conference call Thursday and headlined a public event in Worcester Friday to spark local interest.
“These new $1,000 Build Mass Bonds give smaller investors a unique opportunity to put their money to work in Massachusetts and help invest in generations to come,” Patrick said at the event.
“The governor wants to do everything he can to make sure that the retail demand for these bonds is solid,” Grossman told The Bond Buyer.
In addition, the state is looking to grab anticipated investor liquidity when many interest and principal payments on municipal securities come due June 1, the treasurer said.
Revenue collections from July through April are $587 million above budgeted estimates, with April revenues totaling $732 million more than earlier projections for the month, according to the Department of Revenue.
Strong personal income-tax receipts helped contribute to the revenue boost. Year-to-date income tax revenue is $622 million better than expected.
Conversely, July through April corporate tax revenue came in $34 million below budgeted estimates and sales tax receipts are underperforming by $4 million so far this year.
Grossman hopes the strong revenue collections will help increase Massachusetts’ rainy-day fund to $1 billion or more by the end of fiscal 2011.
“I think it’s exactly the kind of thing that investors, the rating agencies, and the business community would like to see — that ironclad discipline in the way we use excess revenues to get ourselves back into a strong positive situation when it comes to the stabilization fund,” the treasurer said.
All three rating agencies describe Massachusetts’ budgeting and fiscal management as sound and effective during economic downturns. But they also consider debt levels to be high.
The state had $19.5 billion of outstanding GO and special obligation debt as of Dec. 31, according to the official statement for the Series 2011A and Series 2001B bonds.
Total net tax-supported debt is $29 billion, according to Moody’s.
“Based on Moody’s 2010 state debt medians, the state’s debt levels ranked second-highest among the 50 states on both a per-capita basis and as a percentage of personal income, respectively, and is the highest as a percentage of state gross domestic product,” according to a Moody’s report. “Total net tax-supported debt amounted to 9.2% of total personal income in 2009 compared to the 50-state median of 2.5%.”
Massachusetts also faces unfunded pension and other post-employment liabilities of $19.98 billion and $14.8 billion, respectively.
Lawmakers are working on pension reform initiatives that include increasing the retirement age, boosting employee contributions, and terminating early-retirement subsidies.
Massachusetts sold $360 million of new-money Series 2011A GO bonds competitively on March 23. JPMorgan was the winning bidder.
The bonds priced with yields ranging from 3.48% on a 5% coupon for debt maturing in 2022 to a 4.34% yield on a 5% coupon for debt maturing in 2029, according to the OS.
Grossman said he believes increasing Massachusetts’ transparency when heading to the municipal market will serve as a model for other states.
“We feel that it’s critical for investors to have that kind of full disclosure and I’d like Massachusetts to be seen as being right at the top of the list when it comes to disclosure,” the state treasurer said. “I think it would help our pricing and investor interest, and I think it would help our sale of securities, even in tough markets.”
