SAN FRANCISCO — Washington should be well-positioned when the state issues its first bonds of 2015.
The Evergreen State is planning a competitive offering on Jan. 21 that includes $270 million of various purpose GO bonds, $206 million of motor vehicle fuel tax GO bonds, and $58 million of taxable GO bonds.
"Overall, we would expect the Washington deal to go very well," said Michael Johnson, co-chief investment officer and managing partner at Gurtin Fixed Income Management, LLC. "The state is coming to market just when supply should be ramping up following the holidays, and given the state's very high credit quality and expected large maturity sizes, we expect significant interest in Washington's bond issues."
Montague DeRose and Piper Jaffray are financial advisors. Foster Pepper PLLC is bond counsel.
The tax-exempt bonds will have final maturities of 25 years and the taxable bonds will have shorter maturities, according to the state treasurer's office.
The state has no income tax, so local investors don't get a tax benefit for buying in-state debt.
Johnson said his firm views Washington as a very strong credit that is financially sound, has good liquidity, and decent pension-funding levels.
"We do see some near-term financial challenges including rising education expenditures, overall elevated debt levels and recent revenue weakness," he added. "However, we do not believe that these near-term challenges will have a material effect on the state's credit quality over the next couple of years."
Michael Pietronico, chief executive officer at Miller Tabak Asset Management, also notes that the state has a solid economy with responsive financial management.
His firm assigns an internal rating of Aa2 to Washington's GO bonds.
"MTAM expects the upcoming deal to meet with exceptional demand as we see investors gravitating towards quality in 2015," Pietronico said.
Washington carries double-A-plus ratings across the board and has continued to see its economy improve in recent years.
Ellen Evans, Washington's deputy treasurer, noted that the state's Economic and Revenue Forecast Council projects that employment gains and rising personal income will boost general fund state revenues by 9.1% this biennium, and 8.6% in the 2015-17 biennium.
"We expect strong investor interest in the state's transaction," Evans said of next month's deal.
Offsetting the state's credit strengths are a concentrated revenue system that is reliant on the sales tax in the absence of an income tax, as well as above-average debt levels, Pietronico said.
"Debt ratios are in the upper moderate range and expected to remain so," he said. "This reflects funding of substantial capital needs, particularly for transportation."
The state's unfunded pension liability is well below average, but the combined burden of debt plus pensions is above the median for U.S. states, he added.
The new bonds will be secured by the state's full faith, credit and taxing powers. The motor vehicle fuel tax GO bonds are first payable from state excise taxes on motor vehicle and special fuels.
The proceeds from the deal will be used for capital projects throughout the state, including K-12 schools, construction projects for state universities and technical colleges, floodplain management, ferry construction and highway lane improvements, Evans said.
as the $58 million series will be taxable to comply with federal tax regulations regarding loans extended by agencies, including the Housing Trust Fund, Public Works Board and Drinking Water State Revolving Fund to local governments and non-profit organizations.
The state typically sells debt twice a year. At the time of its last new-money offering in June, the state had anticipated selling a higher amount of debt in January, with estimates of $440 million in various purpose GO bonds and $350 million of motor vehicle fuel tax GO bonds.
"The state issues its bonds based on aggregate cash-flow needs which fluctuate with the pace of capital and transportation projects," Evans said of the smaller deal amount.
Washington sold around $1.1 billion of GO bonds in the competitive offering in June, which included taxable, various purpose, motor vehicle tax, and refunding bonds.
Citi submitted the winning bid for the $420.5 million of motor vehicle fuel tax GOs, with a true interest cost of 2.3547%. Bank of America Merrill Lynch won the bid for $420 million of refunding bonds, with a TIC of 2.373%, and for $207 million of various purpose GOs, with a TIC of 3.8649%.
JPMorgan won the bid for the taxable portion, with a 2.5616% TIC.
More recently the state sold $934.1 million of refunding bonds, which will save the state $172 million in debt service costs, according to the treasurer's office.
State Treasurer James McIntire has sold $7.01 billion of refunding bonds since 2009, saving $778.5 million on a present value basis.
He said the last refunding deal yielded "terrific results in a very volatile market" which were "a reflection of the state's strong financial management and credit."
All three agencies assign stable outlooks to their AA-plus level ratings — they haven't yet weighed in on the January deal.
Credit analysts note the state's strong financial policies and practices and its solid economy, which is characterized by generally sound performance and increased diversification.
Washington's economy, historically reliant on manufacturing supplemented by regional and international trade and tourism, has broadened. Economic growth prior to the recession was primarily due to strength in construction, aerospace, and technology, and these remain economic drivers.
Moody's said in an October report that the state's economy is improving and is expected to out-perform the nation over the long term, despite a slow recovery.
"Revenue trends are positive, supported by employment gains and improvement in the state's housing market, and available reserves are increasing, though they remain modest relative to historical levels," the report said.
Following a vote by the machinists' union in early 2014 and a state incentive package passed by the legislature last year, Boeing will manufacture its new 777X jetliner in the state, which is positive news for Washington's economy, as the company had been considering production in other states.
Boeing is the state's largest private employer with approximately 86,000 workers statewide, representing about 3% of the state's labor force.
Challenges to the state's current ratings are significant future increases required in K-12 education funding, which will pose out-year budget challenges, diminished financial flexibility, and exposure to the cyclical aerospace industry.
The state is also reliant on consumption-based revenues without an income tax. Credit analysts say this makes Washington particularly vulnerable to reductions in consumer spending.
As of October, the state had over $18.7 billion of GO bonds outstanding, according to Moody's.
