DALLAS – Waiting for "Brexit" proved highly rewarding for Arkansas as savings on an $83 million taxable refunding far surpassed expectations, state officials said.
"We had perfect timing," said Aaron Burkes, president of the Arkansas Development Finance Authority. "The Brexit was the big factor that dropped rates so much so quickly."
The advance refunding of 2007 bonds was originally scheduled to price June 23, the day Great Britain was voting on whether to exit or remain in the European Union.
On the advice of lead banker Daniel Allen, vice president for underwriter Raymond James, the ADFA decided to delay pricing until June 28. When the British vote to leave was confirmed, rates fell dramatically.
Demand for munis was already high, but the market turmoil created by Brexit, added pressure for investors seeking highly rated securities that could provide higher yields than U.S. Treasuries. The Arkansas bonds were more than two times oversubscribed.
With a true interest cost of 1.47% and all-in cost of 1.53%, the Arkansas bonds provided a spread of 45 basis points over Treasuries, Allen said.
The short maturities on Arkansas' bonds between 2017 to 2022 and ratings of AA from Standard & Poor's put the debt in the bulls eye of investor sentiment. The average life of the bonds was 3.7 years.
Net present value savings for the state came in at $7.2 million or 8.6%, well above the state's 5% threshold for refunding and even greater than the 3.9% that was anticipated when the deal was first proposed in December 2015.
"The market was unlike any other we've seen," said Ro Arrington, public finance officer for the ADFA. "When we received the proposal, net present savings were estimated at 3.9%. Around March or April, NPV rates were about 5%. Then, all of a sudden, boom, you look it up and its 8.6%."
The bonds became taxable because it was a second refunding of debt issued for higher education capital improvements.
Although no future refunding sales are pending, "ADFA will continue to explore refinancing opportunities for all of the State's bond issues," Burkes said.
