SAN FRANCISCO — Double-A-plus Washington is planning to bring $1.2 billion of general obligation bonds to the market next week in four series of negotiated and competitive issues.
Around $231 million will be new money bonds, with a portion of that priced in a negotiated offering by Bank of America Merrill Lynch.
Washington typically sells bonds on a competitive basis, but recently, the state has tried to do a bond sale at least once a year that is available to retail investors in Washington, according to State Treasurer James McIntire.
"We'll do a portion of this as a negotiated sale, and then the balance of what we don't sell will be rolled into our competitive sale," McIntire said. "We don't set a target — we do this as a courtesy to Washington retail investors."
The retail order period is planned Monday.
The state has no income tax, so local investors don't get a tax benefit for buying in-state debt.
The competitive sales are planned for Wednesday.
Proceeds of the $231 million of tax-exempt new money bonds will be used for K-12 school modernization and new construction projects, state universities and colleges, outdoor recreation facilities, and state programs for the Columbia River Basin.
A second series of $86 million of GO new money bonds will be taxable, with proceeds going toward capital projects and loan programs for low-income housing and various energy projects that cannot be financed with tax-exempt bonds.
The remaining two series include $445 million of various purpose GO refunding bonds, and $437 million of motor vehicle fuel tax GO refunding bonds.
McIntire said the state has a policy of only seeking refundings that would garner savings in excess of 5% net present value.
"This is definitely an excess of 5% net present value, and we think that it will be a healthy amount of savings for state taxpayers," he said.
Each portion of the deal will be structured with serial bonds, with a final maturity in 2039.
Foster Pepper PLLC is bond counsel and Montague DeRose and Associates, LLC and Piper Jaffray & Co. are financial advisors.
The state's full faith, credit and taxing powers secure the GO bonds. The motor vehicle fuel tax GO bonds are first payable from state excise taxes on motor vehicle and special fuels.
"In general, Washington is a good, solid state," said Roberto Roffo, senior vice president and portfolio manager at Advisors Asset Management. "It's not the best, but it's a solid state, and I expect demand for the bonds to be pretty strong."
With low issuance expected this year, Roffo said there's a lot of money on the sideline, waiting for high-quality deals.
"A $1.2 billion deal should come with a little bit of a concession, but I think demand's going to be there to really soak it up," Roffo said.
The state typically sells debt twice a year. This sale includes a little less new money and more refunding than in previous years, according to McIntire. The amounts are based on the state's needs for expenditures for capital investments.
Washington priced a $705.7 million competitive GO bond deal in January. After the deal priced, McIntire said the bonds were sold at the tightest spreads the state has seen since the onset of the financial crisis in 2008.
JPMorgan submitted the winning bid for $348.3 million of various purpose GO bonds at a true interest cost of 4.04%. Morgan Stanley won the bid for the $269.3 million of motor vehicle fuel tax GO bonds at a TIC of 3.85%. And Wells Fargo won the bid on the $88.1 million of taxable GO bonds, with a 2.06% TIC.
Washington is rated Aa1 by Moody's Investors Service, and AA-plus by both Standard & Poor's and Fitch Ratings, all with stable outlooks.
All three credit rating agencies affirmed the ratings and outlooks on next week's deal, citing strong demographics, adequate liquidity, and strong financial management.
"The stable outlook reflects our view that the state's liquidity, financial trends, and strengthening economy point to an improving financial position," Standard & Poor's said in its credit report. "Coupled with the state's strong financial management policies and institutions, we see the state's credit rating as stable through the outlook period."
Although the pace of economic and job recovery has leveled off a bit recently, the agency believes the broader economic expansion is embedded well enough to promote the state's ongoing recovery.
"Our revenues continue to come in a little bit ahead of what was expected and are growing," McIntire said. "We're in a solid recovery position and this is a good time for us to be coming to the market."
The state also benefits from a relatively well-educated workforce and good income indicators.
Standard & Poor's estimates that state personal income increased 3.2% in 2013 and is poised to accelerate somewhat at 4.1% and 5.4% in 2014 and 2015, respectively. The agency expects the state's economy to grow by 2.5% and 3.1% in 2014 and 2015.
Fitch Ratings also noted the state's economic and revenue growth during its recovery, which has started to replenish its financial cushion. However, Moody's analysts said the state's recovery has been slow, restraining consumer confidence and leading to renewed revenue weakness.
"Thus far, the revenue reductions appear manageable given the state's $23 billion budget in fiscal 2013, including $7 billion in federal resources," Moody's said. "However, reduced employment could slow the state's economic recovery."
Other credit weaknesses include a concentrated revenue system that is reliant on the sales tax, with no income tax, and above-average debt levels.
After next week's offering the state will have $18.96 billion of outstanding GO bonds. Of this, $7.45 billion is payable first from state excise taxes on motor vehicle and special fuels or toll revenue.
The state also has $1 billion of certificates of participation and other appropriation-backed debt outstanding.
"They're a little bit sensitive to sales tax because they don't have an income tax, but they've done okay with that," Roffo said. "As far as the debt load, it's a little higher than average, but they can handle it."
The state is currently planning to issue around $440 million more various purpose GO bonds and $350 million motor vehicle fuel tax GO bonds in the beginning of 2015.
In addition, if and when market conditions allow, the state will consider additional refundings.
