Connecticut cites bond covenant in oversubscribed sale

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Fiscal restraints under a new bond covenant contributed to strong demand for Connecticut’s general obligation sale, said state Treasurer Denise Nappier.

The state offered $492 million of GO bonds on June 4 and 5, which drew individual and institutional orders totaling $1.522 billion.

“It capitalized on the excellent market tone in the municipal bond arena this week,” said Nappier. “This result appears to reflect, in part, the market’s positive reception of the bond covenant.”

Under the covenant, which the General Assembly passed last October, the state must commit to four financial measures, including a pledge that it will grasp its long-term liabilities, rein in spending and borrowing, and rebuild its budget reserve fund.

The covenant prohibits Connecticut from altering four caps and prevents changes to the formula that establishes the debt limit for five years from issuance of the bonds, except in cases where the governor has declared an emergency and three-fifths of each chamber of the General Assembly votes in support of a change to any cap for that year.

Retail orders totaled $270 million, said Nappier, marking the third-highest amount for GOs over 19 years. Connecticut residents accounted for $107 million.

The spread of 85 basis points on the institutional pricing to the benchmark Municipal Market Data index on the 2038 maturity was an improvement over the 96 points in the previous GO sale in March.

Connecticut sold $400 million in new money bonds, with a true interest cost of 3.53% and $92 million in refunding bonds, with a true interest cost of 3.28%. The refunding will provide debt service savings of $11.2 million over nine years, according to Nappier.

Bank of America Merrill Lynch led the underwriting syndicate.

“The concrete actions that the state is taking to strengthen our reserve fund and bring our spending and borrowing practices within our means go right to the heart of what rating agencies have been saying for some time,” said Nappier.

All four bond rating agencies, which had downgraded Connecticut in 2017, affirmed their ratings before the recent sale. Moody’s Investors Ratings assigned an A1 rating, and S&P Global Ratings and Fitch Ratings rated the bonds A and A-plus, respectively. Kroll Bond Rating Agency assigned its AA-minus rating.

Kroll assigned a negative outlook, the others stable.

Of the $400 million in new money bonds, more than half will provide funding for school construction projects, said Nappier. The remaining funds will backstop grants-in-aid to towns, economic development, brownfield remediation, general capital improvements and the clean water and drinking water programs.

Disclosure counsel are Day Pitney LLP and Soeder & Associates LLC. Tax counsel are Robinson & Cole LLP and Soeder & Associates. Financial advisors are Acacia Financial Group Inc. and PFM Financial Advisors LLC.

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