Louisiana's Ongoing Refunding Parade Is All About Debt Service

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DALLAS — Louisiana will continue its 2013 refunding campaign next week with a planned $580.7 million negotiated deal as the state seeks to lower debt service costs in fiscal 2013 and beyond.

The sale includes $436.4 million of tax-exempt general obligation bonds and a $144.3 million taxable GO tranche. Retail pricing is set for June 19 with institutional pricing on June 20.

Both tranches are being issued as fixed-rate debt.

The refunding will provide an estimated $44 million of net present-value savings, most of it realized in fiscal 2013.

Whit Kling, director of the Louisiana State Bond Commission, said the state will see gross and net savings with both tranches in excess of the commission’s 3% threshold.

“The maturities are not being extended,” he said. “Both refunding series are being done in order to achieve true debt-service savings, both gross and present value.”

Kling projects solid demand.

“We are expecting a very favorable response,” he said. “We would hope to see an issue with an all-in true interest cost in the 2.3% to 2.5% range.”

JPMorgan is lead underwriter. Co-managers include Barclays Capital, Loop Capital Markets, Raymond James | Morgan Keegan, Southwest Securities Inc. and Stephens Inc.

Co-bond counsels are Jones, Walker, Waechter, Poitevent, Carrere & Denegre LLP and Auzenne & Associates LLC.

The state’s financial advisor is Lamont Financial Services Inc.

Louisiana’s $2.4 billion of outstanding GO debt is rated AA by Fitch Ratings and Standard & Poor’s, and an equivalent Aa2 by Moody’s Investors Service.

The state had not obtained ratings on its debt sales from Standard & Poor’s for some time, Kling said, but the situation no longer prevails.

“There were certain legal issues regarding term sheets that prevented our utilization of Standard & Poor’s for the past few years,” he said. “However, those issues have been resolved and we are glad to be able to avail ourselves of Standard & Poor’s services moving forward.”

Louisiana’s credit profile is much improved from the previous decade; all three agencies upgraded the state to double-A levels from single-A in 2009.

Anticipated debt-service savings were a component of Gov. Bobby Jindal’s plan for balancing Louisiana’s $25.7 billion budget for fiscal 2013.

It is the state’s third refunding this year.

Louisiana refunded $803 million of outstanding gasoline and fuels tax bonds May 1. The sale was planned at $550 million but scaled up as low interest rates provided more opportunities.

It could happen again.

“That $580 million is the current working number,” Kling said. “The final actual will be determined as the result of pricing next Tuesday and Wednesday.”

The state also refunded $49 million of GO bonds in March as part of its annual new-money bond sale.

“The market has been very favorable to refunding transactions over the last several months,” Kling said. “It would be hard to believe that it could get lower but given the current world financial crisis that is not outside the realm of possibility.”

Kling said Louisiana will not waste opportunities presented by low interest rates.

“Bottom line, what it will be in the future cannot be answered with firm certainty,” he said. “However, while it is here we intend to take advantage of it.”

Louisiana continually monitors for potential refundings, Kling said.

“We have been very proactive and successful in the refunding arena for the last three to four years,” he said. “We are looking at other transaction opportunities at this time and will be bringing those to the full Bond Commission for action in the very near future.”

The $436.4 million Series 2012C is a conventional refunding of GO debt issued in 2004, 2006, and 2009.

The taxable $144.3 million of Series 2012D will refund $194.7 million of tax-exempt GO bonds issued by the state in 2006 under provisions of the 2005 Gulf Opportunity Zone Act.

The GO Zone Act authorized Louisiana to issue up to $200 million of tax-exempt general obligation bonds to help local governments with debt service requirements after Hurricanes Katrina and Rita hit in 2005.

Proceeds from the 2006 GO Zone bonds were used for debt service by 12 entities that had insufficient revenues following the storms to meet their obligations, Kling said.

The GO Zone bonds could not be refunded as tax-exempt debt, Kling said.

The 2006 GO Zone bonds are not considered part of the state’s net tax supported debt.

Louisiana had a total of $10.37 billion of tax-supported debt at the end of 2011, including $5.8 billion of revenue debt, $2.9 billion of GO debt, $1.6 billion of appropriations-backed debt, and $89.4 million of self-supporting debt.

Reduced debt service in fiscal 2013, which had been estimated at $572 million before Louisiana’s flurry of refundings this year, will help compensate for a projected drop in state revenues in the next fiscal year, which begins July 1.

The state constitution limits debt service to no more than 6% of estimated revenues. Prior to the refundings, debt service in fiscal 2013 was estimated at 5.27% of revenues.

The Revenue Estimating Conference in April revised its official outlook for fiscal 2013, cutting expected revenues by $320 million. The panel also lowered its outlook for fiscal 2012 by $210 million.

The lower revenue expectations resulted in the Legislature ultimately adopting a budget in the waning days of the session that relied on $272 million of one-time funds, mostly from sweeping surpluses from state accounts, to balance.

Louisiana lawmakers also took $205 million from the $600 million rainy-day fund to balance the final month of fiscal 2012.

The spending plan includes $8.27 billion of state general fund revenues.

In their report on the refunding sale, Moody’s analysts Marcia Van Wagner and Emily Raimes said Louisiana’s economy has been on a different cycle from the rest of the nation due to “devastation from serial disasters.”

Payroll employment peaked in July 2005, shortly before the hurricanes, they noted, and the recovery efforts allowed Louisiana to avoid the depths of the recession.

Unemployment fell to 7.1% in April 2010, when it was 8.1% nationally. But then a federal offshore drilling moratorium resulting from the Deepwater Horizon BP rig blowout in late April slowed employment growth, the analysts said.

“The state’s payroll employment has recovered dramatically from post-Katrina lows and has recovered almost all of the jobs lost due to the string of negative events that include Hurricane Rita and the impacts of the Deepwater Horizon oil spill, in addition to Katrina and the recession,” Van Wagner and Raimes wrote.

The state also experienced a population loss from the storms, but the population has returned to the pre-storm level. Per capita income was at 95% of the U.S. average in 2010, up from 78% in 2000.

Fitch analysts Marcy Block and Laura Porter said Louisiana’s economy has shown resilience since the 2005 hurricanes, despite a continued reliance on the volatile oil and gas activity.

“Louisiana’s economic recovery has been steady, with year-over-year employment gains since December 2010, currently surpassing the national average, and the state has fully recovered employment lost during the recession,” they said.

“Employment growth in April 2012 was above that of the nation, with 2.4% year-over-year growth compared to 1.3% for the nation.”

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