Maine gives canceled bond deal another try

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Maine is taking another stab at the sale of more than $100 million general obligation bonds, looking to limit the yield penalty that might result from Gov. Paul LePage's last-minute cancellation of the deal last month.

The Pine Tree State is hitting the market with a $111.3 million borrowing in two negotiated deals Tuesday, six weeks after Gov. Paul LePage blocked the closing of two already-priced voter-authorized GO bond sales citing legislative spending concerns. The torpedoed competitive transaction from June 12 featured $97.4 million of Series 2018B tax-exempt GOs won by Wells Fargo Securities and $15.5 million of Series 2018A taxable GOs awarded to Citigroup.
“I am certain all will go smoothly this time,” said Maine State Treasurer Terry Hayes, who informed both Wells and Citi that the previous deals were canceled after LePage refused to authorize the bonds.

Wells Fargo priced Maine’s $95.8 million Series 2018D GO bond deal on July 25 with 5% coupons to yield from 1.58% in 2020 to 2.51% in 2028. Citi priced the state’s $15.5 million 2018 Series C taxable GOs also scheduled to sell on July 31. Hilltop Securities is the financial advisor and Locke Lord is bond counsel for both transactions.

“It appears that the cancellation had minimal impact on yields, attributable to the recent scarcity of supply,” said Janney Capital Markets municipal analyst Alan Schankel. “I suspect there were other costs for the state as result of the cancellation, but there seems to be no yield penalty for Maine.”

Hayes, who is seeking to replace the term-limited LePage as an independent gubernatorial candidate this fall, said all maturities on both the taxable and tax-exempt bonds were within two basis points of the June 12 spreads. She said that while the state will experience an increase in immediate costs of issuance from having to twice pay fees for its bond counsel, financial advisor and printing services, it will save on the overall true interest cost.

Howard Cure, director of municipal bond research at Evercore Wealth Management, said last month’s “unusual circumstances” with LePage blocking a competitive bond deal from closing left Maine with little choice but to go with a negotiated route in the second go around. He stressed that a new governor will be in place next year, so there probably won’t be any long-term implications for trading or future Maine bond transactions.

“This deal will get done since the underwriter should be guaranteeing the sale with it then being up to the underwriter to get the transaction off of its balance sheet by selling the bonds to the market,” said Cure. “It would be interesting to see what the bank’s takedown is on this transaction versus other negotiated state transactions or if there are any outs for the bank based on the possibility of the Governor attempting to block the sale again.”

Schankel said the market impact from the recent sale cancellation is difficult to measure since only $14.5 million of Maine GO bonds have traded in the past month, according to recent data from the Municipal Securities Rulemaking Board. He noted that the 2.51 yield for 10-year maturities is only six basis points over the triple-A yields and eight basis points above the Municipal Market Data Yield Curve, making the pricing consistent with spreads before last month’s canceled transaction.

“Using negotiated format this time is best, since competitive bidders might be hesitant to put best foot forward after the June deal cancellation,” said Schankel. “In other circumstances, I believe the state would pay a cost in the form of somewhat higher rates of around one to two basis points, but overall light supply and continuing tight credit spreads will probably minimize or eliminate any rate penalty. “

Maine plans to use the bonds mainly for transportation infrastructure improvements as well as funding environmental, drinking water, housing and research and development projects. The bonds, which were rated Aa2 by Moody's Investors Service and AA by S&P Global Ratings, will also reimburse the state for roughly $54 million of internally borrowed funds that were used to begin the various construction projects. Both credit agencies said last month’s sudden cancellation did not factor into the updated ratings.

Moody’s analyst Pisei Chea said in a June 20 report that the Aa2 rating reflects the state’s “stable economy” and improving financial conditions despite a below-average fund balance. She noted that the deal has a stable outlook based in large part to the state’s strong general fund revenue performance for the 2018 fiscal year with collections finishing at 2.3% over what was budgeted.

S&P analyst Jillian Legnos noted that Maine’s credit conditions from low debt and modest pension liabilities. She said the state also has strengths based on a “strong framework” for debt repayment, a history of making budget adjustments when necessary and increases to its budget stabilization fund in recent years.

The press office for LePage did not respond for comment on whether he plans to allow the latest bond sale to close. Hayes also clashed with the Republican governor last year for a planned $100 million transportation bond sale before reaching an accord just before the deadline. He has sparred with lawmakers over borrowing in recent years and held up past bond sales from going to market due to disputes over funding for timber harvesting on state-owned land and the state’s rainy day fund.

Maine’s second crack at selling GO bonds in six weeks arrives in the midst of LePage battling the state legislature over funding for voter-approved Medicaid expansion. The Maine Supreme Court heard arguments on July 18 from consumer advocacy groups suing the state to try and force the LePage administration to implement the program, which was approved in a referendum vote last November.

The governor recently vetoed a measure to pay for expansion through one-time tobacco settlement and budget surplus funds.

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