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Hawaii Heads into Storm-Disrupted Primary Market

NOV 8, 2012 12:34pm ET
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LOS ANGELES -- Hawaii escaped the wrath of nature visited on the East Coast by Hurricane Sandy, but the monstrous storm managed to impact the state’s plans to sell $900 million in general obligation bonds Nov. 13 and 14.

State officials canceled an investor tour that included stops in Boston, Chicago and New York planned for late October when the storm was at its height, said Kalbert Young, the state’s finance director.

Aside from that missed opportunity, Young said he’s worried about how the storm will impact the new-issue calendar.

“I’m concerned about the migration of some issuers who were supposed to go the week the storm hit, if they should create a crowding effect,” Young said.

He also questioned what impact the storm might have on the appetite of institutional investors, particularly insurance companies.

Goldman, Sachs & Co. and Bank of America Merrill Lynch are co-lead managers for the syndicate that will price the bonds in three series with $374 million of new money, a $400 million refunding, and $26 million in taxable general obligation bonds.

Officials are hoping to see interest rates less than the 3.38% in true interest costs the state achieved on last year’s $1.3 billion sale in November, when Hawaii had its lowest rates ever. They hope to achieve savings in the $17 million to $19 million range on the refunding, Young said.

“They are a very strong credit,” said Peter Miller, the state’s financial advisor and managing director of the San Francisco office of Public Financial Management. “We are comfortable they will get rates commensurate with their ratings.”

A bevy of funds have expressed interest and strong retail demand is expected, Miller said.

Hawaii’s $4.9 billion in GO debt is double-A rated by the three major rating agencies. Moody’s Investors Service affirmed its Aa2 rating and stable outlook Wednesday; while the other two the rating agencies had yet to rate the new issuance as of publication time.

In affirming the Aa2 rating, Moody’s credited Hawaii for strong governance practices such as multi-year financial planning. The state also released its fiscal 2011 audit in a timely manner, reversing four consecutive years of late audits from fiscal 2007 to fiscal 2010, the report said.

The rating incorporates the state’s improving financial operations following the recession-driven revenue fall-off over the last several years, low pension funding ratios and growing expenses for other post-employment benefits, and high debt ratios that in part reflect debt issues for K-12 school capital projects, the report said.

Analysts cited the state’s growing tourism industry as a positive.

Most of the bond proceeds will be used to fund major school repairs and maintenance projects, Young said. Unlike other states, education in Hawaii is funded solely at the state level. Proceeds will also go to pay this year’s $30 million payment on a 20-year settlement with Hawaiian Home Lands that expires in two years.

The taxable bonds are for affordable housing projects that don’t qualify to be tax-exempt because of the structure of the deals with the developers, Young said.

So far, it doesn’t look like Hawaii will have that much competition the week the sale is planned, said Craig Brothers, managing director/portfolio manager for Los Angeles-based Bel Air Investment Advisors.

Only a few large deals were slated for the week including the $830 million Texas Transportation Commission turnpike revenue bond sale.

The hurricane caused 30-day visible supply to drop to $7-8 billion, lower than the $11 billion to $13 billion range for the same period last year despite the fact that issuance is generally up over last year, said Peyton Studebaker, a vice president with Richmond, Va.-based Caprin Asset Management.

“This is certainly, in part, due to many deals being pulled as Hurricane Sandy disrupted Northeast trading desks last week,” Studebaker said.

Overall, Studebaker said his firm has seen a marked increase in overall issuance in 2012 compared to last year, which he said was mainly from refunding deals as issuers try to lock in historically low rates.

Less new money has come to market because of the uncertainty surrounding the economy, the election, the fiscal cliff and the muni tax exemption, he said.

Despite the year-over-year increase in supply, Studebaker said investor demand has more than outpaced issuance.

“I think we will still see fairly strong investor demand, especially for lower-rated yield-oriented deals,” Studebaker said.

The market is hungry for new supply, particularly from names, like Hawaii, that it does not see all the time, Brothers said.

“Hawaii GOs are not a new credit to market, but they are not in the market constantly,” Brothers said. “The state of California is in the market all the time, so there are periods when buyers are tired of those bonds and don’t want exposure to them.”

Brothers also doesn’t think the size of the deal will impact investor interest.

He pointed to the healthy reception received by California’s competitive sale of $539 million in GO bonds by J.P. Morgan on Oct. 23.

That said, Brothers said mid-November isn’t typically the best time of year to price bonds.

“The money coming into the market starts to diminish later in the year,” Brothers said. “January and July are the biggest months for reinvestment, because there are a lot of investors with coupons to reinvest.”

Hawaii officials hope to receive the level of interest the state did on its last combined new-money and refunding issue of $1.3 billion in November 2011. That sale came after the state stayed out of the market for more than a year and a half.

The state typically issues GOs twice a year to pay for infrastructure costs, but waited, said Young, in order to reduce debt service costs in 2011.

“We were oversold in our last transaction,” Young said. “The total request for the bonds exceeded by four times what Hawaii had planned to sell last year.”

Young also hopes that his effort to broaden the pool of underwriters used by the state has led to a better understanding of the state’s economics.

Since he took the job as the state’s finance director 18 months ago, Young has worked to broaden the pool.

“If you look at the last transaction and this one, we have a good amount of underwriters involved who have never participated in bond transactions in this state as managers and co-managers,” Young said.

Among those is Goldman Sachs, co-lead manager on the deal. Wells Fargo, a co-manager, also has not been an underwriter previously on a Hawaiian bond deal.

The state also has increased the number of firms involved on a single transaction. This one has two senior managers and six co-managers.

“We have made a concerted effort to get more experience and exposure among underwriting firms doing business in Hawaii,” Young said.

Young said he launched the effort because of the consolidation that occurred in the banking industry after the financial crisis.

“I think the taxpayers are benefitting because the state gets exposure to lower rates,” he said.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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