CHICAGO — Indiana this week comes to market with $61 million of revenue bonds that feature a first-time state appropriation pledge for the Indiana State Fair Commission as it builds to recover from a deadly accident.
In 2011, seven people died and dozens were injured in the collapse of the fairground’s main outdoor concert stage.
The bulk of the proceeds from this week’s deal will be used to renovate an indoor complex where all large concerts will now be held instead of the outdoor stage that collapsed as fans awaited a performance by country music act Sugarland.
The Fair Commission is a rare borrower with modest debt that last came to market more than a decade ago. Revenues have been down since the accident.
For this year’s event, officials shuttled fairgoers to an arena about seven miles from the fairgrounds in downtown Indianapolis, but the shows failed to generate expected profits.
Fair officials recently announced that they would not host any more large, paid concerts at the fair until 2014 when the high-profile renovation of the historic Pepsi Coliseum is completed.
The Indiana General Assembly signed off on the fair borrowing last summer and agreed to a biennial legislative appropriation to cover debt service, though revenues from the fair can also be tapped.
Debt service is expected to total $3.5 million annually for the first two years, rising to a maximum of $4.3 million.
Rating agency analysts have given the bonds high double-A ratings, tied to Indiana’s own triple-A underlying rating. Indiana does not issue general obligation bonds, and its appropriation pledge is its highest.
Key to the Hoosier State’s stellar credit is its low debt burden — near the bottom among all states — which last week was cut another 5% when Gov. Mitch Daniels announced he would pay off $147 million of obligations with a mix of cash and surplus funds.
The move will defease $116 million of state appropriation-backed facilities bonds, the same type of debt being issued this week for the fair.
The team will take retail orders Wednesday and open it up to institutional buyers Thursday.
This week’s deal marks the first time the Indiana Finance Authority, the state’s debt issuer, has issued bonds on behalf of the State Fair Commission.
The commission has just under $10 million of outstanding bonds, issued originally in 2001 and refunded in 2002, which is the last time it came to market. The issue will refund those 2002 bonds, which total $9.7 million.
A piece of the debt with a 4.5% coupon and 2017 maturity was yielding 4.86% in recent trading, according to the Municipal Securities Rulemaking Board EMMA website.
The finance team opted to issue the bonds with a state appropriation pledge to boost investor interest by highlighting the state’s credit as opposed to the fair itself, according to James McGoff, the IFA’s general counsel.
“The state appropriation credit is much more recognizable to the market than analyzing the revenues of the state fair,” he said. “This will be a first for the fair.”
JPMorgan is the senior book-running manager on the deal. JJB Hilliard, WL Lyons LLC, Piper Jaffray & Co. and Wells Fargo Securities round out the underwriting team. Ice Miller LLP is bond counsel. Sycamore Advisors LLC is financial advisor on the deal.
It includes $61.1 million of facilities revenue bonds divided into two series. Series A consists of $4.5 million of bonds that mature in 2017 and Series B consists of $56.6 million of bonds that are a mix of serial bonds that mature in 2037 and term bonds that mature in 2038.
Outside of the $9.7 million refunding, most of the proceeds will be used for a major renovation of the Pepsi Coliseum venue at the fairgrounds and construction of a new arena adjacent to the Coliseum.
The 250-acre fairgrounds are owned by the state.
The Pepsi Coliseum is a 1939 brick building that includes year-round programming, including an ice rink where an amateur junior hockey team plays, and where all large paid concerts will now be held.
The renovation will demolish the Coliseum’s interior and build a new interior concert area that can seat up to 8,000. The exterior work will preserve the brick, limestone, and glass block windows as well as the building’s other historic features.
Proceeds will also be used to build a new adjacent arena that features a secondary ice rink and livestock event floor that will be used as a backup space for the Coliseum.
The new arena is set to open in time for the next state fair, in August 2013, while the Coliseum renovation is scheduled to be completed by August 2014. No paid concerts will be held until the Coliseum reopens.
Fitch Ratings rates the bonds AA-plus rating with a stable outlook and Moody’s Investors Service Aa2 with a stable outlook.
The rating agencies tied the ratings to the state’s strong credit, which is anchored by large reserves and modest debt.
In a separate comment released Monday, Moody’s said Daniels’ move to retire $147 million of debt is a credit positive, saying it will trim Indiana’s outstanding obligations by another 5%.
“Indiana has returned to fiscal health more quickly than most states,” Moody’s said.
Analysts noted that the state has steadily rebuilt its reserves during the past few years, boosting them from a negative balance in 2006 to a projected $2 billion balance as of the end of 2013.
Budget officials also project a structural surplus of $425 million in fiscal 2013 as a result of “expenditure restraint and conservative revenue projections,” according to Moody’s.
The state’s net-tax supported debt per capita ranks 42nd among the states, Moody’s said.
Of the $147 million being retired, $116 million are facilities revenue bonds and the rest are leases.
The bonds were set to mature in 2015, 2020, and 2032 and 2033.
The state will pay off the debt off with a mix of available general-fund dollars, surplus money, and roughly $10 million that was generated from a recent debt refinancing.
The move saves Indiana $68 million of debt-service payments scheduled for the upcoming 2014-2015 biennium and another $125 million through 2033, according to the budget office.
“We’re wanting to leave things in the best possible shape for the next governor, and to us a balanced budget doesn’t mean anything unless it’s an actual structural balance,” assistant state budget director John Vanator said.
“We looked at what’s due in the short term, where we can shore up our structural surplus, and free up some recurring structural dollars that otherwise we’d be paying through at least the coming biennium,” he added.
At a press conference announcing the move last week, Daniels said the state has paid off more than half its tax-supported debt since 2005, cutting it to $1.7 billion from $3.6 million.
The $1.7 billion figure does not include university debt or debt floated to finance the state’s convention center and the Lucas Oil Stadium, where the National Football League’s Indianapolis Colts play. With those bonds included, Indiana has $2.9 billion of outstanding debt.
The state’s new governor will be required to submit a budget in January, just weeks after taking office.
He will face some big decisions, including whether to expand the state’s Medicaid program under the new federal health care law, but will begin from a strong position due to Daniels’ efforts, according to Vanator.
“We’ve made a concentrated effort over the past eight years to increase transparency and increase planning ahead,” he said, “and the new governor will take office with the understanding that we’ve left him in a tremendous position, a position where he has a lot of choices.”
