In one of the largest deals scheduled for the municipal market this week, the Dormitory Authority of the State of New York is expected to sell $2 billion of state personal income tax revenue refunding bonds on Wednesday.
The deal will be priced by Goldman, Sachs & Co., beginning Tuesday with a retail order period.
Hawkins Delafield & Wood LLP and Bryant Burgher Jaffe LLP are co-bond counsel. Public Financial Management Inc. is financial advisor.
Proceeds from the bonds will refund various series of New York State-supported debt.
Portia Lee, DASNY’s managing director of public finance and portfolio monitoring, said the authority is expecting $300 million in present-value interest rate savings.
Lee said $1.58 billion of the bond proceeds is expected to refund a portion of outstanding Metropolitan Transportation Authority state service contract refunding bonds, which are callable beginning July 1.
Some of the MTA bonds were issued in 2002 to finance transit and commuter projects and were secured by payments from New York.
The proceeds will also refund $190 million of outstanding PIT bonds previously issued by DASNY, which helped fund educational projects for the State University of New York, the City University of New York and various state facilities.
About $310 million will refund outstanding PIT bonds issued by the Empire State Development Corp. The bonds were issued to fund correctional facilities, youth facilities and economic development projects.
Wednesday’s deal — New York’s first PIT bond issue in the fiscal year that began April 1 — will be structured as term and serial, and some debt will be subject to redemption.
The serial bonds will have maturities from 2017 through 2034.
DASNY, a public benefit corporation created by state legislation in 1944, finances and builds facilities for higher education, health care providers, court facilities, nonprofit institutions and public agencies.
The bonds are secured by a pledge of payments under an agreement between the authority and the state.
The payments come from a revenue bond tax fund, which receives a statutory allocation of 25% of state personal income tax receipts.
“Generally, income taxes are less volatile than sales taxes, and they tend to provide more stability to investors,” said Eric Friedland, head of municipal research at Schroder Investment Management.
Overall, he viewed the bonds favorably, noting the strong PIT coverage, debt service coverage and anti-dilution provisions.
“Unfortunately, the bonds tend to come pretty rich because the rest of the market views them pretty favorably, as well,” Friedland said.
Adding to demand for the bonds is the “supply and demand mismatch” in the market right now, he said, with redemptions outpacing new issuance.
In fiscal 2011-2012, New York’s personal income tax receipts totaled $38.8 billion and the revenue bond tax-fund receipts totaled $9.8 billion. For 2012-13, PIT receipts are projected to be $40.3 billion and revenue bond tax-fund receipts are pegged at $10.1 billion. Estimates are based on the 2012-13 enacted budget financial plan.
According to the preliminary official statement, the available fund receipts of $9.8 billion represents approximately 4.3 times the maximum annual debt service for all outstanding state PIT revenue bonds, including the bonds being issued this week.
PIT revenue bonds are relatively new, having been authorized by legislation in 2001.
DASNY is among five agencies that can issue PIT revenue bonds, along with the Empire State Development Corp., the New York State Housing Finance Agency, the New York State Thruway Authority and the New York State Environmental Facilities Corp.
Because they are backed by personal income tax, which is considered a strong revenue source, the bonds have received high ratings from rating agencies.
“PITs remain an important component of New York State’s revenue mix, accounting for about 59% of state tax receipts in all state funds. We believe the PIT set-aside of the 25% on a monthly basis fully discounts concerns about its potential volatility,” Standard & Poor’s analysts said in a report on DASNY’s last PIT sale in December.
Standard & Poor’s had not rated the new bonds as of Friday afternoon, but it assigned a AAA to outstanding PIT bonds, higher than the AA on the state’s general obligation bonds.
In addition to the strength of the state’s personal income tax, the rating agency cited strong coverage of 4.01 times and solid bond covenants mirroring a revenue bond structure, not an appropriation credit structure.
Under New York’s constitution, state funds, including those in the revenue bond tax fund, require appropriation from the Legislature at least every two years.
However, in the event of non-appropriation, the revenue bond tax fund would still continue to accumulate tax receipts, which Standard & Poor’s said eliminates the risk of non-appropriation.
Fitch Ratings gave DASNY’s last PIT revenue bonds a AA. The rating agency also cited the strong structure that eliminates non-appropriation risk, an adequate additional bonds test and the general credit quality of New York. Fitch rates New York’s GOs AA.
In its last PIT revenue bond sale, DASNY saw yields ranging from 0.35% with a 3% coupon in 2012 to 4.31% with a 5.25% coupon in 2036.
Also coming to the market Wednesday are two issues totaling $600 million from the Port Authority of New York and New Jersey.
The authority is expected to auction $300 million of consolidated bonds in a competitive offering to finance capital projects and for refunding purposes due to low interest rates, said spokesman Steve Coleman.
The bonds will be issued as serial or term, depending on the successful bidder, and will have a final maturity in 2032. Bonds maturing after 2022 will be subject to redemption.
On the same day, the authority will auction $300 million of consolidated notes in a competitive offering. The notes will mature on Dec. 1, 2012.
Projects that the Port Authority is currently or planning to work on include replacing the George Washington Bridge suspender ropes, the new Goethals bridge and raising the roadway of the Bayonne Bridge.
The authority’s upcoming bonds and notes have not been rated yet, but its outstanding bonds are rated Aa2 with a negative outlook by Moody’s Investors Service, and AA-minus by both Standard & Poor’s and Fitch.
