The Massachusetts School Building Authority will come to market Tuesday with its $500 million sale of senior dedicated sales tax bonds through negotiation, one week after Moody’s Investors Service downgraded the bonds.
Proceeds will fund grants to cities, towns and regional school districts for construction and renovation projects.
Bank of America Merrill Lynch is lead manager.
The authority will hold a one-day retail order sale for the Series 2013A bonds on Tuesday, followed by the institutional sale.
Securing the bonds is the money Massachusetts receives from a dedicated 1% statewide sales tax, drawn from the sales tax of 6.25%.
Moody’s on June 3 lowered the senior bonds to Aa2 from Aa1 and the subordinated bonds to Aa3 from Aa2. The outlook is stable. The move affects $5 billion of outstanding senior bonds and $293 million of subordinated bonds.
The downgrade reflects “greater volatility of the commonwealth’s sales tax than originally expected when the MSBA dedicated sales tax bonds were first issued, particularly during the recent recession.,” the rating company said. The volatility has lowered projected coverage to less than two times maximum annual debt service, Moody’s said.
The pledged 1-cent sales tax declined by a cumulative 7.9% between fiscal years 2007 and 2010, said Moody’s, and is not expected to surpass the pre-recession peak until fiscal 2014.
“This is our first new money issue since Moody’s new methodology for special tax credits was issued last year. The authority’s financial strength has only improved over the past year through strategic refundings and increases in the commonwealth’s sales tax collections,” an authority spokesman said in a statement. “We believe the report should have discussed the impact that Moody’s revised criteria had on our rating, or maintained the rating on our senior lien debt at Aa1.”
Fitch Ratings and Standard & Poor’s each assigned AA-plus ratings.
“Although revenue trends have been weak relative to historical growth levels and leverage will increase for the program, we believe coverage will remain strong,” said Standard & Poor’s analyst Robin Prunty.
The state legislature created the quasi-independent authority in 2004 to overhaul the process of funding capital improvement projects in public schools statewide. It has made more than $9.7 billion in reimbursements to cities, towns and regional school districts for school construction projects.
According to the authority, reducing the waiting period for school districts to receive payments has saved municipalities nearly $3 billion in local interest costs.