LOS ANGELES — Hawaii priced $160 million in highway revenue bonds this week in a market starved for new supply, raising more than planned and lowering its borrowing costs.
The sale was oversubscribed by four times, according to Luis Salaveria, Hawaii's deputy finance director.
The state had originally planned to price $139 million. Retail sales were slated for Tuesday with institutional sales to follow on Wednesday.
The reception from investors was so great that most of the bonds ended up going to Hawaii retail buyers; the last of the bonds were sold to institutional investors Tuesday afternoon, Salaveria said.
"We ended up having significant orders," he said. "We had close to $670 million in orders for $160 million in bonds."
Hawaii benefited from a drought in issuance coupled with surging demand. Muni volume this year through June has plunged to $149 billion from $179 billion a year earlier. Demand for municipal debt picked up last week, as muni funds reported the biggest inflows since early May, according to Lipper FMI.
"Buyers, us included, know that August is kind of a vacation month for new issuance," said Craig Brothers, a managing director with Beverly Hills-based Belair Investment LLC. "With low treasury rates and a small calendar going into August, it is a great time to bring a deal. Every deal is getting bumped and way oversubscribed."
Salaveria said the Hawaii sale may have attracted more attention because of a Bond Buyer story in which a Virginia trader talked about how attractive highway revenue bonds are right now.
The all-in interest rate was approximately 2.96% on the 20-year bonds, he said.
An infrequent issuer of highway revenue bonds, Hawaii last sold them "back in 2011 and before that, it was 2008," according to Kalbert Young, the state's finance director.
The proceeds will fund modernizing and resurfacing projects on the 950 linear miles of roadways on the state's six major populated islands.
"Many of these projects have either already been completed, are in-progress, or are slated to start within the next 12 months," Young said. "The vast majority of these projects come with supplemental federal funds as well."
Federal funding was not, however, pledged revenue for these bonds, Salaveria said, which he thinks added to their appeal.
The state will need federal funding to support projects that are part of its long-range plan. In the near term the projects will be paid for through the money that Hawaii receives from its vehicle registration tax, motor vehicle weight tax and gas taxes. To decrease the state's dependence on gas taxes, Hawaii raised its vehicle registration and motor vehicle weight taxes in 2011, Salaveria said.
While the majority of the projects involve modernizing and resurfacing existing roadways, there are also some that will enlarge existing highway traffic capacity and involve the construction of new highway and roadways, Young said.
As the state does not sell highway revenue bonds that frequently, or offer a lot of bonds relative to other locales, Young said officials were anticipating a fair amount of interest.
Given the scarcity of Hawaii bonds in general, and the limited availability of Hawaii revenue bonds, Young said the state was able to take advantage of very tight pricing spreads to Municipal Market Data index.
Peyton Studebaker, director of trading for Richmond, Va.-based Caprin Asset Management, said his firm wasn't among the investors swooping in to buy the bonds, because Caprin has shied away from transportation deals because of the uncertainty surrounding federal funding.
He agreed with Salaveria that the fact the bonds are not federal funding-pledged probably contributed to demand.
"Market participants are a little wary of Garvee bonds and transportation bonds because of what is going on and the uncertainty surrounding transportation funding in Washington D.C.," Salaveria said, referring to Grant Anticipation Revenue Vehicles.
On other hand, those state Garvee bonds that have received meaningful downgrades over the last six or eight months, also offered a little more yield, which is an attractive proposition for investors given how tight spreads have been, Studebaker said.
"Bonds that have more yield have plenty of demand, because everyone is searching for yield," he said.
If the bond markets were running above average on a supply basis and investors had more bonds to choose from, perhaps that sector might struggle a little bit more, he said.
"The fact of the matter is that there are just no bonds around, so people are being forced to look at anything they can to find paper and find some ways to enhance yield," he said.
Tuesday's $100 million deal by the Jurupa Public Finance Authority, for example, was oversubscribed anywhere from three to 15 times for a BBB-plus issue, he said.
Normally there is a "smaller universe of buyers for bonds that are less than A-rated, but there is no yield in the market," he said.
The Jurupa deal was, "a big size for a Triple-B-plus rated issue in California, so you have people coming out of the woodwork," he said. "And a decent spread to the AAA-rated scale. It was a larger deal, so people were not fighting over crumbs.
The Jurupa bonds were special tax revenue bonds, issued to refund 11 outstanding series of community services district bonds, the so-called dirt bonds are more commonly called Mello-Roos bonds after the 1980s-era California legislation that created them. Stifel was the underwriter on the bonds, which had maturities stretching to 2042. The Jurupa community service district is located in Eastvale, Calif. in the Inland Empire's northern Riverside County.
Money managers have coupons and money from bonds that matured on a July 1 and August 1 schedule to spend, Belair Investment's Brothers said.
"So it was the perfect environment to bring a deal like [Hawaii's]," he said. "It is pretty difficult to get your hands on bonds right now, which is great for the issuers."
The issuers know that if investors don't like the price bump and step aside, the deal will still get deal done, he said. It would just be three or four times oversubscribed as opposed to 15, he said.
"It is a function of the timing of the deal, it is good there is very little paper around," Studebaker said. "And most deals that we are seeing that are priced according to the credit, are being oversubscribed multiple times.
"We are seeing food fights on a lot of new issue deals," he said.
The co-senior underwriters on the Hawaii deal were Robert W. Baird and Wells Fargo Securities. First Southwest Company was the financial advisor. The bonds received AA, Aa2 and AA-plus ratings from Fitch Ratings, Moody's Investors Service, and Standard & Poor's, respectively.
"Our refunding savings generated over 8% refunding savings for $5 million in present value savings, which translates to $460,000 a year savings in debt service," Salaveria said. The refunding portion of the sale was $62 million of the $160 million total.
The increase in registration and vehicle weight taxes bumped Hawaii's revenues to fund its highway projects by 40% from 2011 to 2013.
"That was very compelling to a lot of investors," Salaveria said.