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Now Stable Across the Board, Washington Preps $864M Deal

LOS ANGELES — Boosted by two improved outlooks on its already high credit ratings, Washington is set to sell $864 million of general obligation bonds in a three-part competitive offering on Aug. 7.

The deal will include $533 million of various purpose GO bonds, $275 million of motor vehicle fuel tax GO bonds, and $56 million of taxable GO bonds. Proceeds will go toward financing various capital projects and transportation projects, including a tunnel in Seattle.

Foster Pepper PLLC is the bond counsel. Montague DeRose and Associates and Piper Jaffray & Co., Seattle-Northwest Division, are the financial advisors.

"The Washington State GO credit is one that we are comfortable buying as a firm," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "The very sound management practices in both forecasting and budgeting by the state keep this issuer well-respected by the market, and as such, we see solid demand for its upcoming sale."

Chris McGann, a spokesman for the treasurer's office, said the state expects investor demand to be further strengthened by two recently improved credit rating outlooks.

Moody's Investors Service and Fitch Ratings both revised their outlooks on the state to stable from negative ahead of next week's sale, citing its improving financial position.

Moody's assigned the bonds its second-highest Aa1 rating. Both Standard & Poor's and Fitch assigned their equivalent AA-plus ratings. S&P's outlook remains stable.

Maturities on the various purpose GO bonds range from 2017 through 2038. The fuel tax bonds will mature in 2014 through 2038, and the taxable bonds will mature in 2014 through 2017.

"The series are structured with level debt service, which is characteristic of the sate of Washington's conservative financings," McGann said.

Proceeds from the various purpose bonds will provide funds for state expenditures on capital projects and state programs for outdoor recreation, habitat conservation, and farmland preservation.

The motor vehicle fuel tax GO bonds are being issued to provide funds to pay and reimburse state expenditures for state and local highway improvements, including high occupancy vehicle projects in Pierce County, improvements to Interstate 90 at Snoqualmie Pass East, and improvements to the State Route 522/Snohomish River Bridge.

Proceeds will also go toward replacing the SR 99 Alaskan Way Viaduct-a main north-south route through Seattle-with a bored tunnel. Part of the structure was damaged during a 2001 earthquake and studies have shown that it may collapse if another major earthquake occurs.

The total cost for the tunnel replacement is estimated at $3.2 billion. The new tunnel is scheduled to open to traffic in December 2015.

The taxable GO bond proceeds will go toward financing and reimbursing state expenditures for non-transportation related projects that cannot be financed with tax-exempt bonds.

All of the GO bonds are backed by the state's full faith, credit, and taxing powers, but the fuel tax bonds are first payable from state excise taxes on motor vehicle and special fuels.

McGann said the state typically has semi-annual GO bond sales, and usually issues them competitively.

Washington last came to market with GO bonds in January, selling $230 million of various purpose GO bonds, $324 million of motor vehicle fuel tax GO bonds, and $785 million of refunding bonds.

Yields on the various purpose GO bonds ranged from 0.2% with a 2% coupon in 2014 to 3.1% with a 4% coupon in 2038. Yields on the motor vehicle fuel tax bonds ranged from 0.6% with a 5% coupon in 2016 to 3.25% with a 4% coupon in 2043.

State Treasurer James McIntire said following the January bond sales that the state saved more than $79 million, citing its strong credit rating and reputation for prudent financial management.

Since January, the state's economic gains that have boosted revenues, improving reserve position, and largely recurring budget balancing solutions led to Moody's assigning an improved outlook.

Analysts said they expect that the state will continue to address any budget gaps that emerge, as it has in the past, and absorb the substantial increase in mandated basic education funding.

The most recent Washington budget was not passed without drama — after two special sessions, lawmakers passed a budget June 27, averting a shutdown of most of state government that would have taken effect July 1.

But the end result kept Washington in the ratings agencies' good graces.

"The Aa1 general obligation rating incorporates Washington's sound management tools such as its quarterly consensus revenue forecasting process and demonstrated willingness to address budget shortfalls, along with an economy that is improving and expected to out-perform the nation over the long term, despite a slow recovery," Moody's said in a report.

Analysts also noted employment gains and improvement in the state's housing market, but said these strengths are tempered by exposure to the cyclical aerospace industry and above average debt ratios.

Moody's also warned that significant future increases required in K-12 education funding will pose out-year budget challenges.

In raising its outlook to stable, Fitch noted the improvement in the state's economic and revenue performance.

Following the revisions, the state treasurer said the improvement would help Washington generate strong investor interest.

"They provide a measure of optimism about the state's housing market and overall economy, but especially recognize the Legislature's willingness to take the actions necessary to pass a balanced budget for the 2013-15 biennium," McIntire said in a statement.

However, he noted that there are still challenges ahead that will require a larger, and farther reaching effort, to overcome.

Fitch cautioned that the state is particularly vulnerable to reductions in consumer spending, since it has no income tax and relies on consumption-based revenues.

This makes watching consumer spending trends a must for prospective buyers, said Miller Tabak's Pietronico.

"Investors who perceive the economy as having better prospects down the road may find greater comfort in this credit as it relies heavily on consumption - based revenues," he said.

Pietronico added that the fact that there is no state income tax might result in the deal pricing slightly wider relative to the benchmark triple-A due to its size.

Standard & Poor's said that while the sales tax-based revenue structure is sensitive to economic cycles, it is to a lesser degree than those of states that rely primarily on income taxes.

The agency has maintained a stable outlook on Washington since 2007. Analyst said the outlook reflects the agency's view that the state's liquidity, financial trends, and strengthening economy point to an improving financial position.

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