Hawaii Looks Nationally for $1.27 Billion GO Sale

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LOS ANGELES — A crowded bond calendar and the size of Hawaii's $1.27 billion general obligation bond sale next week mean the deal will likely have to be priced nationally to clear the market, according to one market watcher.

"The deal in and of itself is too large for the typical retail investor in the state to peck away at it," said Michael Pietronico, chief executive of Miller Tabak Asset Management in New York.

Hawaii is planning $800 million of new-money GOs, and a $467 million refunding. Bank of America Merrill Lynch is lead manager.

The effect of pricing on a national basis means wider-than-normal spreads will have to be attached to the loan, Pietronico said. The end result could be a 10 or 15 basis point concession from where the bonds would normally trade in the secondary market, he said.

Overall, the calendar is heavy as issuers try to push bonds out before the end of the year, Pietronico said.

Two other deals coming to market next week that are contributing to a crowded calendar are New Jersey's $1.3 billion Transportation Trust Fund Authority sale and North Carolina's planned $400 million limited obligation bond issue.

"I'm surprised more issuers don't come out in the first two weeks of January or in June or July when there is a lot of investor cash hitting accounts in terms of interest payments and bond redemptions," Pietronico said. "I know it's structural, but if issuers exhibited a more proactive nature, they could save quite a bit of taxpayer money."

The decision to issue in November is, in fact, partly a structural decision for Hawaii.

The state has a five-month legislative session that begins in January, and it is difficult to find the administrative time at the beginning of the year, Kalbert Young, Hawaii's finance director, said of the decision to go to market now. Young is also part of the relatively new administration of Gov. Neil Abercrombie, who took office in December 2010.

Hawaii hasn't sold GO bonds since February 2010 and the state needed to replenish the bond fund, Young said. The proceeds are being used primarily to pay for school construction and maintenance projects that are already underway. Unlike in most states, education in Hawaii is funded solely at the state level.

The state, which usually issues bonds twice a year, made a decision to delay new bonds until now to save money on new debt service in 2011, Young said. It has $4.86 billion of outstanding bond debt, according to Moody's Investors Service.

The other reason for holding off on bonds was that state officials wanted to focus attention on concluding the comprehensive annual financial report for fiscal 2010, which had not been completed when Abercrombie took office, Young said.

Hawaii officials are hoping for a 10% gross savings of about $30 million to $40 million on the refunding, Young said.

"If the markets stay where they currently are, we will be satisfied," Young said. "We are using 20-year debt, so we will be short on the long end of the curve. Under state law, Hawaii can't issue more than 25-year debt."

The new bonds and refunding received AA ratings from Standard & Poor's and Fitch Ratings, and an Aa2 rating from Moody's.

"State revenue performance has begun to improve, and for the first three months of fiscal 2012, tax collections are outpacing the same period during the past two fiscal years," said Standard & Poor's analyst Gabriel Petek. "Tourism, which in large part determines the fate of state tax revenue trends, is also showing signs of modest growth."

Moody's rating is below the Aa1 that it gives most states, however, said Nicole Johnson, a senior vice president at the rating agency.

"We did downgrade Hawaii in May from Aa1," Johnson said.

While Moody's gives the state credit for the proactive measures it has taken, some concerns remain.

For instance, while the state has reduced benefits for new hires, its pension fund is only funded at a 61.5% ratio. And based on projections, that ratio will reach a new low of 59% in 2015.

"They are taking steps, but it is going to get worse before it gets better," Johnson said. "Even with the changes, they are expecting it will remain below a 70% funded ratio for 20 years."

The current average funded ratio for states is in the 70% range. It used to be in the 80% to 85% range, she said.

Hawaii has implemented a series of cuts to state programs and revenue enhancements to bolster its coffers.

Former Gov. Linda Lingle approved layoffs last year involving 800 employees and implemented a hiring freeze and attrition program that Abercrombie continued through the first quarter of this year, which helped reduce the projected shortfall to $200 million, Young said.

Hawaii had been anticipating a $1.25 billion deficit over the 2011-2013 biennium.

The state has implemented six revenue enhancement measures that are expected to contribute $250 million to $300 million to the $11.1 billion fiscal 2012 budget. The measures included the two-year suspension of a business exemption from a general excise tax, which is expected to bring in $140 million. The Legislature passed a five-year cap on the amount of hotel taxes distributed to counties, generating an additional $20 million in revenue for the state.

The spending plan also assumes $180 million in labor savings from contract talks between the administration and public-sector labor unions; or about a 5% pay cut, according to budget documents. The state also has $8 billion in unfunded liability in the public-worker retirement fund and a $14 billion liability in the public-worker health care fund.

In its report, Moody's analysts credited Abercrombie's willingness to implement aggressive solutions totaling $1.32 billion to balance the biennial budget. Analysts also lauded the state's efforts to replenish its nearly depleted emergency budget reserve and hurricane relief fund.

Moody's also said stabilization and modest growth across a number of key economic indicators should help buoy tax revenues.

The state's reliance on tourism from both U.S. and international visitors and construction activities, which are still down, remained a concern.

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