DALLAS - Arizona is in the market for some interest-rate savings with $168 million of certificates of participation boosted by two recent upgrades in an improving economy.
The COPs are scheduled to price June 30 through negotiation with senior manager Morgan Stanley, led by executive director Charles Peck. Bank of America Merrill Lynch & Co., J.P. Morgan, and Stifel are co-managers.
Kurt Freund, managing director at RBC Capital Markets is financial advisor on the deal.
Moody's Investors Service rated the deal Aa3, one notch below the state's issuer credit rating of Aa2. Moody's upgraded Arizona's issuer credit rating to Aa2 from Aa3 on May 4, citing legislative steps to rebalance the budget.
Standard & Poor's followed suit 16 days later, upgrading the state's issuer credit rating to AA from AA-minus.
S&P rates the COPs AA-minus, a notch lower than the state's issuer credit rating of AA.
Both agencies assign stable outlooks.
Arizona Comptroller Clark Partridge said the upgrades reflect the state's growing recovery after some of the deepest deficits in its history.
"While the state was significantly impacted by the last recession, the state's economic and budget situation have largely recovered," Partridge in an investor presentation. "Arizona's total income levels have also grown over the last several years."
The upcoming COPs refund issues in 2005 and 2008.
Arizona was hit particularly hard by the collapse of the state's housing market. The state lost 11% of its jobs from 2007 to 2010, compared to 5.6% for the U.S. as a whole. Unemployment peaked at 10.4% in 2010, versus 9.6% for the U.S.
"Although the state has not replaced all of the jobs lost in the recession, job growth has generally out-paced the U.S. since 2012," Moody's lead analyst Kenneth Kurtz said. "The state's sizable hospitality and financial services sectors have experienced particularly strong employment growth."
From the first quarter of 2009 to the third quarter of 2014 single-family home prices in the state increased by 37.2% and now match the U.S. level. Migration into the state now exceeds 2007 levels that made Arizona the second-fastest growing state at the time.
As part of the recently adopted 2016 budget, the state used several one-time and recurring actions to stabilize reserves in the fiscal year beginning July 1 and restore the budget to structural balance by 2018.
Based on projected base revenue growth of 5.1% in 2018, the Legislative Budget Committee projects reserves of about $375 million at the end of 2018, up slightly from the end of 2014, Moody's notes.
Arizona has about $2.5 billion of debt on par with the upcoming issue, according to Moody's. Including state university debt and other obligations, the state owes about $8.6 billion, according to the state treasurer.
With constitutional restrictions on general obligation debt, the state issues appropriation-backed lease debt, largely related to school construction, and revenue bonds, including the Arizona Transportation Board's Highway Revenue Bonds and Grant Anticipation Notes. The state has also issued sales tax bonds in support of school capital needs and lottery revenue bonds. The state has no variable rate debt outstanding.
"Based on Moody's 2014 State Debt Medians report, which looks at debt issued through the end of calendar year 2013, Arizona ranked 29th among states for net tax-supported debt per capita and 28th for net tax-supported debt as a percent of personal income," Kurtz said. "State net tax-supported debt per capita was $951, slightly below the state median of $1,054. Debt, as a percentage of personal income, was 2.5%, slightly below the state median of 2.6%."
S&P analyst David Hitchcock cautioned that the state still faces challenges.
"Although housing might again experience slumps, we do not expect the state to repeat such a severe housing crisis as it did in the last recession for the foreseeable future," Hitchcock said. "Should large structural budget imbalances develop again, we could lower our rating or revise the outlook to negative. An upgrade would likely require improved income levels and lower pension liabilities."
