Kentucky preps bond deal as the state's economy reopens from COVID-19 shutdown

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Kentucky, which began a phased reopening of its economy on May 11, plans to issue debt for operations and capital needs at the University of Louisville Health Medical Center.

The Kentucky State Property and Buildings Commission will price the $35.4 million taxable lease revenue bond deal Tuesday.

Shoppers at a Louisville, Kentucky, farmers market must conform to new social distancing regulations as the state deals with the coronavirus.

It is Kentucky's first bond issuance since increasing its disclosure efforts through BondLink, and as the state prepares for an upcoming series of sales.

The deal is expected to be structured with serial maturities between 2020 and 2035, and a $9.12 million term bond maturing in 2039.

Citi is the book-runner. Members of the selling group are Baird, PNC Capital Markets and Raymond James. Kutak Rock LLP is bond counsel. Frost Brown Todd LLC is underwriters' counsel.

The bonds are rated A-plus by Fitch Ratings and A1 by Moody's Investors Service. Moody's has a stable outlook.

Fitch, which also affirmed Kentucky's AA-minus issuer default rating, revised its outlook on the state's debt to negative from stable over concerns the "economic and revenue decline due to the coronavirus pandemic will be substantial for Kentucky, deeper than in many other states, and will limit the state's ability to quickly restore financial resilience."

"Kentucky was already facing challenges in getting to structural balance and the current crisis will make that virtually impossible in the near term," said Fitch analyst Eric Kim. "Continued budget balancing challenges despite economic expansion indicate a structural problem in Kentucky that extends beyond the effects of economic cyclicality on financial operations, and which could be further strained in this downturn."

The state's economic outlook reflects a weak trajectory for the fourth quarter of fiscal 2020 and forecasts sustained negative economic growth for all of fiscal 2021, according to a disclosure regarding COVID-19 in the preliminary official statement.

"Both the general fund and the Kentucky road fund will see double-digit losses in revenue growth in the fourth quarter of fiscal year 2020," the POS said.

On May 6, the state reported that April’s general fund receipts "dropped precipitously" due to the impact of the novel coronavirus and moving the income tax filing deadline to July 15.

General fund collections fell $432.9 million or 33.6% compared with April 2019. Nearly 90% of the decline was due to delayed individual and corporate income tax filings.

The state budget director recently released an unofficial general fund revenue estimate for fiscal 2020 that called for a revenue shortfall of between $318.7 million and $495.7 million, a range also disclosed in the POS.

“The economy has been hit hard by policies necessary to limit the spread of the virus and to save lives," said state budget director John Hicks. “Looking ahead to the last two months of the fiscal year, the economic consequences of job losses, impacts on business, and significant curtailment of consumer activity are expected to continue."

April’s road fund receipts dropped by $43.9 million or 30.1%, with the tax on vehicle sales falling by 60.1% and motor fuels tax dropping by 11.8%.

Road fund receipts fell to $101.7 million, a decline of 30.1%, or $43.9 million less than what was collected last year.

The recently released unofficial revenue estimate calls for road fund revenues to decline between 8.3% and 13.3% in the current fiscal year, which would result in a revenue shortfall of between $116.4 million and $194.6 million.

Hicks said the state's Consensus Forecasting Group will revise the fiscal 2020 revenue estimates for the general and road funds in May. The new estimate will guide the actions of the governor in balancing the current year’s budget, he added.

Moody's said the state prudently approved a one-year budget for fiscal 2021, instead of adopting biennial spending plans, citing elevated economic, revenue and expenditure uncertainty.

The governor has executive authority to cut expenses up to 5% without legislative approval, a strong governance element that has helped contribute to operating surpluses in six of the last seven years, said Moody's analyst Genevieve Nolan.

"The Commonwealth's continued ability to find structural operating balance, while also funding its long-term liabilities, remains a key credit consideration," Nolan said.

The State Property and Buildings Commission plans to meet Monday to consider approving a series of bond issuance, including about $197 million for various capital projects; $150.8 million for economic development and university capital improvement projects; and $87 million to finance a University of Louisville residence hall.

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Coronavirus State budgets Revenue bonds Kentucky State Property & Buildings Commission State of Kentucky Kentucky
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