Connecticut GO sale second under new bond covenant

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Connecticut intends to come to market with this week's only state general obligation sale, an $889.1 million offering of general obligation bonds in three tranches.

Wednesday’s institutional sale will follow a one-day retail period, according to Christopher Martin, assistant state treasurer for debt management.

The state plans to issue $400 million of Series 2018E bonds to retire bond anticipation notes issued last December, and $239.1 million of Series 2018F refunding bonds, both tax-exempt.

A $250 million sale of Series 2018A new-money GOs is federally taxable.

Siebert Cisneros Shank & Co. LLC is bookrunning senior manager. Acacia Financial Group Inc. and PFM Financial Services LLC are co-financial advisors. Day Pitney LLP is lead bond counsel.

This marks Connecticut’s second GO sale since fiscal restraints under a new bond covenant took effect. According to state Treasurer Denise Nappier, the covenant contributed to strong demand for Connecticut’s sale in June. Then, a $492 GO offering drew individual and institutional orders totaling $1.522 billion.

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

All four bond rating agencies, which had downgraded Connecticut in 2017 over budget imbalance, revenue shortfalls and high legacy costs, affirmed their ratings for the past two sales.

Moody’s Investors Service rates Connecticut GOs A1. S&P Global Ratings and Fitch Ratings rate them A and A-plus, respectively, while Kroll Bond Rating Agency rates them AA-minus. Kroll’s outlook is negative, the others’ stable.

"Reflecting a general tightening of credit spreads and based on Bloomberg data, the differential between the 10-year AAA benchmark and Connecticut’s 10- year yield has narrowed from 98 basis points in May to about 74 basis points heading into this week’s offering," said Janney Capital Markets.

The state’s stagnant economy has been a backdrop of the statewide political campaigns. Democratic and Republican primaries are scheduled for Tuesday, with neither Dannel Malloy nor Nappier seeking re-election for governor and treasurer, respectively.

“Connecticut’s economy is on a stronger footing than it was a year ago, but the state still has a long way to go and is a clear laggard among its New England peers,” said Moody’s Analytics economist Emily Mandel.

“[It] will gradually gain ground, but the state will have barely recovered its prerecession employment peak by the time the U.S. economy stalls in 2020,” said Mandel. “Softness in consumer-driven industries will remain a major obstacle as Connecticut struggles with an older and rapidly aging population.”

Connecticut's economic and budget struggles contrast with wealth metrics. Its average per-capita income is 140% of the national average.

The state's operates under a biennial budget. This year’s midterm adjustments included $182 million in GO bond authorizations that took effect for fiscal 2019, and the cancellation of $406.3 million in existing authorizations.

The state’s Office of Policy and Management projects a $504.6 million deficit for fiscal 2018 as of July 20, despite a $96 million improvement last month. Its rainy-day balance sits at $1.15 billion.

Connecticut’s debt totals $18.7 billion, which stands $2.7 billion below its debt limit.

Roughly 90% of Connecticut’s bonds are fixed rate. “The state maintains a conservative debt structure,” Martin said on an investor call. Bonds, he said, are typically structured with a 20-year level amortization.

Connecticut in March agreed to assume capital city Hartford’s obligation on about $540 million of general obligation bonds, under a 2017 state budget provision enabling the state to work out so-called contract assistance agreements with struggling cities.

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