LOS ANGELES — Hawaii may face competition in the bond market Nov. 1, when it plans to price $821 million in general obligation bonds in a combined new money/refunding deal.
New issue supply has begun to weigh on the market as municipals lag behind U.S. treasuries in the recent post debt ceiling rally, according to Peyton Studebaker, director of trading for Richmond, Va.-based Caprin Asset Management.
"The main question will be how much competition the state may face with other issuers by the time the planned sale date in early November arrives," Studebaker said.
The current Bond Buyer 30-day visible supply number now stands at over $12 billion versus its six month average of just under $9 billion, Studebaker said. "If this forward supply continues to grow, and meaningful outflows persists in municipal mutual funds, then we could see general market demand overwhelmed and yields pushed higher to compensate," he said. "This could certainly affect overall interest cost for the state's issue -- were it to happen."
Kalbert Young, the state's finance director, said the worst-case scenario would be a treasury sell-off where yields escalated and carried over into the state and municipal issues, which peg interest rates off of treasuries.
"Right now, we are still content that the market is sufficient for us to go ahead with plans to price the bonds," Young said.
The $635 million of new-money proceeds will be used for improvement projects, including public buildings and facilities, elementary and secondary schools, community college and university facilities, libraries and parks.
Bank of America Merrill Lynch, Morgan Stanley and RBC Capital Markets are co-lead managers for the 10-member syndicate that will price the bonds in seven series.
The bond sale includes $181 million in refundings in four series and $44 million in two taxable series.
The Double-A rated state has fared well with what has become an annual fall issuance over the past three years although traditionally the state had conducted two sales a year.
It achieved 2.48 true interest costs across its 20-year issue on last year's $866.9 million sale.
"Our expectation is that this sale will be 75 basis points higher, so in the 3.2% range," Young said.
The bump up in interest represents an additional $12 million in debt service on the $635 million in new money GOs, he said.
Even if interest rates creep up, Young said Hawaii plans to issue similar amounts over the next two to four years.
"Although rates are moving up, they are still historically lower than normal," Young said. "We are still in a good environment to issue new debt relatively speaking to historical rates."
Standard & Poor's revised the outlook on the state's $5.4 billion in outstanding GO bonds to positive in an Oct. 9 and gave the planned bond sale a AA rating.
"We believe that by choosing to recapitalize its rainy day reserves and initiate the process of reining in its retiree liabilities, the state has laid the groundwork for its credit quality to strengthen," said Gabriel Petek, an S&P analyst.
The bonds are rated Aa2 by Moody's Investors Service and AA by Fitch Ratings.
Abercrombie signed three bills in July that built up Hawaii's reserves, replacing the draw-down that occurred during the recession, and pre-funding OPEB liabilities.
Despite the market upheaval, Studebaker said the Hawaii GO deal should still fare reasonably well as higher quality bonds in the municipal market continue to see adequate demand.
The firmer tone now seen in the U.S. Treasury market and more attractive municipal to treasury ratios should also help keep investors engaged and insulate municipal bonds to some degree from a shorter term supply elevation, he said.
