Alabama’s state school authority preps $1.5 billion deal, its largest ever
The state of Alabama's most prolific issuer is preparing to sell its largest bond sale ever, in part, to take advantage of the low interest rate environment.
The Alabama Public School and College Authority plans to issue nearly $1.5 billion of tax-exempt and taxable, new and refunding bonds, around Oct. 22 in a deal proposed by Republican Gov. Kay Ivey.
Most of the deal, $1.25 billion of 20-year tax-exempt new-money debt, will finance capital projects at all levels of public education, from kindergarten to colleges and universities. Some $206.3 million of taxable bonds will advance refund portions of prior deals.
"We'll price to sell at a premium and we'll end up with more money" for educational facilities, said Kelly Butler, the state's director of finance. "We want to get the best deal we can."
Butler also said it's possible some yield-starved bond buyers could see a tick up in returns on their investment.
The market is expected to easily absorb the deal, given that investors have a good appetite for municipal debt, a market observer said.
For the first three quarters of 2020, muni bond volume stands at $341.82 billion, up from $280.73 billion in the same period of 2019.
As of Wednesday, the APSCA deal is the largest scheduled negotiated deal the week of Oct. 19 on Refinitiv’s TM3 primary market calendar.
The offering is structured as $1.275 billion of tax-exempt capital improvement and refunding bonds, $58.83 million of taxable refunding bonds, and $147.45 million of taxable capital improvement pool refunding bonds.
The bonds are rated Aa1 by Moody's Investors Service, AA-plus by Fitch Ratings, and AA by S&P Global Ratings. All three have stable outlooks on the authority's debt.
Wells Fargo Securities is the book-running manager for the 10-member syndicate.
Next week's deal will be the largest ever from the APSCA. The second-largest deal the authority sold was $1.07 billion of capital improvement bonds in December 2007.
Those bonds were priced to yield 3.03% with a 5% coupon maturing Dec. 1, 2008; 3.67% with a 5% coupon maturing Dec. 1, 2017; and 4.64% with a 2.5% coupon in the final maturity of Dec. 1, 2027. The final maturity sold at a spread of 47 basis points to the triple-A scale, according to Refinitiv.
Butler said this is a good time for the authority to issue debt because it's been awhile since the 2007 sale and interest rates remain historically low.
“We think we’re in a good position to get a lot of interest in this,” he said. “We’re feeling pretty good about where we’re going into the market, before the holidays and the election.”
Schools and universities are ready to build, he said, adding, this deal is expected to be the last bond issue from the state this year.
Preparing the transaction for the bond market was delayed somewhat because of actions taken to deal with the coronavirus that causes COVID-19.
Ivey, a former high school teacher, asked the Legislature to approve the school bonds as part of her budget and finance package earlier this year. The annual session started Feb. 4 and was scheduled to adjourn May 19.
"The Legislature was very receptive," Butler said about the bond proposal. "Everything was running smoothly."
Lawmakers went into recess in early March, as part of the state plan to stem the spread of the virus. Work resumed at the end of May and lawmakers passed the APSCA bond bill.
From that point, the Alabama Department of Finance began putting together the finance team and making presentations to rating agencies, Butler said.
At the same time, the department became the point agency for doling out $1.79 billion of funding from the federal Coronavirus, Aid, Relief and Economic Security Act to cities, counties, healthcare entities, businesses, nonprofit and faith-based organizations.
Portions of the CARES Act funding were also allocated to equipment and infrastructure for government agencies to work remotely, technology and infrastructure for remote educational classes, and funding for courts, health departments, and other lawful purposes the federal act allowed.
The Alabama Public School and College Authority was created in 1965 as a public corporation to succeed the Alabama Education Authority, a similar financing entity that financed capital improvements for public education facilities.
The state maintains the Education Trust Fund as part of its budget to fund school operations and capital needs. The ETF segregates taxes and revenues earmarked for various educational purposes, including debt service payments.
The principal and interest on the authority's bonds are paid solely from certain pledged revenues, including a utility gross receipts tax, a utility service use tax, and a portion of state sales and use taxes.
In fiscal 2021, the state estimates the revenues dedicated to the bonds will cover debt service by 10.67 times, according to a bond roadshow presentation for investors.
As the state’s largest issuer, the APSCA has $1.32 billion of outstanding bonds compared with the state's $591 million of general obligation bonds, said Moody's analyst Ted Hampton. Moody's assigns a credit rating of Aa1 to the state's GOs.
"The state's stable outlook, which applies to the authority's bonds, is supported by the likelihood of continued prudent financial management practices, including expenditure reductions, if needed, to offset unexpected revenue declines," Hampton said.
S&P said despite strong economic headwinds in the second quarter of 2020 and the potential for a slow economic recovery over the near- and medium-term, revenues pledged to the school bonds will be supported by the same generally strong credit fundamentals that existed prior to the pandemic.
Based on the state's 2020 year-end revenue estimates as of Sept. 30, net pledged revenues increased 3.8% in fiscal year 2020 compared to fiscal year 2019, S&P said.
Fitch analyst Karen Krop said the authority's debt service is not subject to appropriation.
Given the minimal leveraging of pledged revenues and high debt-service coverage, she said, the APSCA structure can easily absorb a decline in revenues expected to result from a moderate recession.
"The current downturn is not expected to have a material impact on pledged revenues or the resiliency of the structure," Krop said. "Alabama is currently operating with coronavirus mitigation measures that include a statewide mask mandate, social distancing, and capacity limits in businesses."
Coronavirus case counts increased over the summer months, she noted, and although they have since declined, state economic performance is likely to be closely tied to public health conditions and will remain difficult to forecast while the pandemic persists.
As of Wednesday, the Alabama Department of Health reported 167,977 positive cases of COVID-19, and 2,706 deaths from the disease.
PFM is the authority's financial advisor on next week's deal.
Co-senior lead managers are Wells Fargo Securities and Piper Sandler & Co. Senior co-managers are Goldman Sachs & Co. and The Frazer Lanier Co.
Co-managers are Joe Jolly & Co.; Protective Securities, a Division of Proequities Inc.; Raymond James; Securities Capital Corp.; Stifel; and Thornton Farish Inc.
Maynard, Cooper & Gale PC is bond counsel. Bradley Arant Bolt Cummings LLP is underwriters' counsel. Balch & Bingham LLP is disclosure counsel.