WASHINGTON — Delaware will sell $340 million of triple-A rated general obligation tax-exempt debt in two transactions next week, pricing $115 million by negotiation and $225 million by competitive bidding.
The negotiated deal, primarily a refunding of GO debt issued in 2005, 2006, 2007, and 2011, is scheduled for Feb. 19, while the competitive deal will be new money and sell Feb. 21. The bonds have earned the top rating from all three major rating agencies, as Delaware is one of only eight states with a unanimous triple-A credit rating.
Underwriting the negotiated deal will be a syndicated headed by Bank of America Merrill Lynch, along with Raymond James/Morgan Keegan, Drexel Hamilton, Loop Capital Markets, M&T Securities, and TD Securities. Saul Ewing LLP will serve as bond counsel, and Public Financial Management Inc. will be the financial advisor.
Louis Vitola, director of finance and treasury services in the Delaware State Treasurer's office, said dividing the $340 million of bonds into two different types of transactions struck a balance between two desired outcomes of the sale.
"The issue was split into negotiated and competitive components because it results in the best deal for the state while preserving the ability for retail investors to acquire Delaware bonds easily," Vitola said.
Delaware has been active in issuing GO bonds, going to market for more than $200 million each year since 2008. In rating Delaware's bonds triple-A, Fitch ratings noted that Delaware has an "above average" debt burden, with about $1.7 billion of outstanding GO bonds. Debt service sat at about 4% of revenues in fiscal year 2012. Delaware's high debt burden stems from the state's financing of capital improvements handled locally in most other states, such as public school districts. Delaware funds between 60% and 80% of these capital projects within the state.
The state has also been slow to rebound from the great recession, trailing the rest of the nation in year-over-year economic growth. Despite that slow growth, Delaware has bested most of the country in employment figures, posting a 6.9% unemployment rate in December 2012 against a national average of 7.8%.
Thanks to its especially friendly incorporation statutes, Delaware is the legal home to most U.S. corporations. Close to one million entities, including more than half of the Fortune 500 companies, are incorporated there according to the Delaware Department of State. Various related fees and taxes provide an important revenue stream for Delaware: abandoned property typically accounts for over 10% of general fund revenues.
Another positive credit analysts pointed to is Delaware's lack of major unfunded pension liabilities, and issue that has plagued states like California, Illinois, and Rhode Island.
"The state employees' pension system maintains strong funded ratios and the state consistently funds its actuarially calculated annual required contributions," Fitch analyst Marcy Block concluded.
The state's pension system was actually over funded until investment losses created an unfunded liability in 2009. Reforms launched in 2012 cut some new state employee benefits and required increased contributions.
Closing on the bonds is expected around Feb. 28.