LOS ANGELES — With almost $1 billion of January bond sales in the books, Washington plans to return to market next week with another $483.6 million in general obligation bonds.
Washington Treasurer James McIntire said the state achieved "fantastic results " Jan. 21 in its four competitive sales totaling $998.6 million, with true interest costs averaging 3.26% across all four series. Its next GO sale — a $483.6 million refunding in three series — is scheduled to go to bid on Feb. 10.
McIntire takes credit for saving Washington $1 billion in interest through 22 refunding bond deals for more than $7.9 billion since he took office in January 2009.
The state's decision to hold two separate competitive sales three weeks apart paid off, given the volatility in the market that occurred when Washington priced the first four series on Jan. 21, according to Matt Fabian, managing director of Municipal Market Analytics.
"It's understandable - especially since deals were struggling that day," Fabian said.
The U.S. municipal bond market hit some turbulence that day after details of the European Central Bank's quantitative easing came out, causing a sell-off in U.A. Treasuries, he said. Low European bond yields have resulted in money flowing from overseas into Treasuries, but the potential for inflation in the Eurozone and resulting outflows of that money caused a ripple effect in the municipal bond markets that day.
Ellen Evans, Washington's debt manager, said the decision to split the planned sale into two was mainly a technical one based on the difficulty of managing bidding on seven different series of bonds on the same day, though there was secondary concern over the reception a larger amount of paper might receive on a single day.
Whether Washington prices the remaining three series of bonds as currently scheduled on Feb. 10 or a different day could depend on market conditions.
"The market has been bouncy lately," Evans said. "You never know. There could be a big snowstorm."
Investors are already keyed into plans for next week's sales because they were included in offering documents that came out prior to the Jan. 21 sale, she said.
The bonds sold Jan. 21 were well-received, and "in many variations, our spreads have tightened since the sale," Evans said.
Five different bidders competed for the $460 million series of various purpose GO refunding bonds, with Bank of America Merrill Lynch the victor with a true interest cost of 2.6%, McIntire said. The Series R-2015E bonds were priced as 5s to yield 0.30% in 2015 and to yield from 0.81% with a 5% coupon in 2018 to 2.65% with a 5% coupon in 2033.
The $282.3 million of various purpose new money GOs were won by Morgan Stanley with a TIC of 3.37%. The Series 2015B bonds were priced as serials to yield from 1.65% with a 5% coupon in 2022 to 2.84% with a 5% coupon in 2040.
The $200.6 million of new money vehicle fuel tax GOs were won by Bank of America Merrill Lynch with a TIC of 3.23%. The Series 2015C bonds were priced as serials to yield from 0.15% with a 5% coupon in 2016 to 2.85% with a 5% coupon in 2040.
Wells Fargo Securities won the $58.2 million taxable GO series with a TIC of 1.58%. The Series 2015T-2 taxables were priced at par to yield from 0.30%, 15 basis points over Treasuries, in 2016 to 2.19%, 57 basis points over Treasuries, in 2022.
Washington GOs carry AA-plus-level ratings and stable outlooks from the three major rating agencies.
Scheduled for sale next week are the Series R-2015F $177 million motor vehicle fuel tax G.O. refunding bonds; the $133.5 million Series R-2015H motor vehicle fuel tax GO refunding bonds; and the Series R-2015G $172 million motor vehicle fuel tax GO refunding bonds.
McIntire said Washington may be near the end of its refunding program with this sale given the volume it has pumped out during the era of low interest rates. The state's policy is to achieve 5% net present value savings on its refundings.
"So far, we have been very happy with the results," McIntire said. "We have saved enough money to fund two community colleges for a two-year cycle of the biennium."
The savings works out to be $85 million for the upcoming biennium for all the refundings the treasury has done since 2007, he said.
The state hopes to achieve savings close to the 9.2% net present value it achieved on its Jan. 21 sale, McIntire said. Washington saved $45.2 million over the life of the $462 million in bonds refunded in January works out to be $45.2 million in January, he said.
The state uses the Seattle-Northwest Division of Piper Jaffray & Co. as its financial advisor on refundings and Montague DeRose and Associates LLC of Walnut Creek, Calif. as the financial advisors on new money sales. The law firm Foster Pepper is bond and disclosure counsel to the state.
"The state begins 2015 in a strong position, but coming to agreement on a new two-year state budget during the upcoming legislative session may be challenging, in our view," Standard & Poor's credit analyst Gabriel Petek said in a Jan. 30 report. "Nevertheless, the stable outlook reflects our view that the state's liquidity, financial trends, and strengthening economy have resulted in a strengthened financial position."
Moody's tempered its rating with a cautionary note about the state's "sizeable budget gap for the 2015-17 biennium driven largely by education spending mandates, exposure to the cyclical aerospace industry, and above average debt ratios."
Estimates from Washington Gov. Jay Inslee's office put the budget gap at $4.5 billion over the biennium, McIntire said. His proposed budget for the biennium is $39.2 billion, compared to the current $33.9 billion budget.
Growth in the state has resulted in increasing infrastructure needs, particularly in transportation, McIntire said in response to questions about the debt ratio. He adds that the state legislature is discussing a transportation package that could result in additional revenue for projects.
He pointed to a $4.5 billion project to build two bridges across Lake Washington and a project to rebuild a corridor between Interstate 5 among projects that have ratcheted state debt up. Washington has another project to reconfigure Highway 99 along the waterfront in Seattle replacing a 62-year-old viaduct damaged in the 2001 earthquake with a tunnel.
The state will have a total of $18.8 billion of GO bonds outstanding after the current offering.
Of this, Petek said, $7.45 billion is payable first from excise taxes on motor vehicle and special fuels or from toll revenue. The state also has $1.02 billion of certificates of participation and other appropriation-backed debt outstanding. Of this, $77.8 million is GO debt of various local agencies within the state and is a contingent obligation of the state government in the event of nonpayment by a local government agency.
