Delaware Readies $216 Million Issue of Fixed-Rate GO Bonds

In its first and likely only issue of the year, Delaware this week plans to competitively sell $216 million of fixed-rated general obligation bonds, with about $16 million of that for refunding.

While the deal is competitive, the state has a retail order period scheduled for Friday and Monday where up to $45 million of bonds will be offered to retail buyers. On March 4, the state will competitively sell the remainder of the debt.

"It's really a way for Delaware investors to buy first-hand Delaware bonds," said bond finance director of Stephanie Scola of the retail order period. "We've done it a couple of other times before ... It's been very successful for us."

State law requires Delaware to sell new-money bonds competitively. The addition of the retail order period on its competitive sales came about a few years ago when Delaware officials were hearing concerns from potential Delaware investors who were not able to get their hands on state GO bonds.

Many bonds were being sold to institutional investors, but not many found their way into retail hands, according to Geoffrey Stewart, a senior managing consultant at Public Financial Management, the financial adviser to the deal. Saul Ewing LLP is the bond counsel for the deal.

The state decided to change the epilogue language in the Delaware code to allow it to sell a certain percentage of bonds that is authorized each year in a retail sale. Merrill Lynch & Co. is leading the retail selling group that contains 12 banks, Stewart said.

While Merrill and the selling group have access to the $45 million inventory, they are under no obligation to underwrite the $45 million of bonds, which will contain both new and refunding components. If not all of the $45 million is sold, it will be thrown back into the mix for the competitive deal on Tuesday.

PFM has helped Delaware with two other competitive sales that included a retail order period, and so far they've been pleased with the results, Stewart said. In 2005, Delaware sold $32.4 million in its retail order sale, and it sold $33.7 million in 2006.

With amending the epilogue language, "I think it has satisfied and made the objectives of making bonds available to Delawareans," Stewart said. "We have found that we have been able to accomplish our objectives - broad retail distribution, and it hasn't cost Delaware more money in terms of cost of funds."

The proceeds of the new money portion of the deal will be used primarily for school construction, Scola said. The $16.4 million current refunding will replace 1998 bonds with newer interest rates that are expected to save the state about $700,000, said Stewart. The state's threshold for savings is 3%, and it is expecting a net present-value savings of 4.27%.

"Interest rates are at attractive levels," said Stewart, "We're hopeful to lock in a low cost of funds for the state."

Delaware does not plan to use insurance, as Fitch Ratings, Moody's Investors Service, and Standard & Poor's rate Delaware's GO bonds triple-A.

Still, Delaware is "experiencing some revenue weakness like most places," said Fitch senior director Laura Porter. The Delaware Economic and Financial Advisory Council, which reviews revenue forecasts six times each fiscal year, in December forecast lower revenues than expected for the state. Fiscal 2008 general fund revenues were at $3.4 billion, or 2.7% above the prior year, as compared to growth of 3.8% in fiscal 2007 and 10.2% in fiscal 2006.

Despite expected lower revenues, Porter said that Delaware is good at addressing its challenges. The revenue weakness is "something they're very aware of and they are looking at balancing measures, as we would expect," Porter said.

After this deal, Delaware has no plans to issue additional debt this year.

"We hope that the proceeds of this sale will carry us through the calendar year," Scola said.

Delaware had about $1.3 billion of outstanding GO debt as of December, according to Scola.

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