WASHINGTON - Maryland kicked off its first-ever negotiated deal with a three-day retail order period that began Friday for $410 million of general obligation bonds. The triple-A rated state also plans to take bids for $100 million of GOs on Wednesday.
Maryland joins other highly rated municipal issuers who have decided to sell bonds through negotiation with underwriters as opposed to taking competitive bids, given the unsettled conditions in the muni market.
As cash-strapped institutions have largely withdrawn from the market, issuers have turned to negotiated deals to cater to the needs of individual investors who in many cases now provide the bulk of the orders. And retail investors are especially attracted to triple-A rated GO bonds from well-known issuers
The entire package consists of $325 million of First Series A GOs, $85 million of First Series B refunding GOs, and $100 million of First Series C GOs.
Lead underwriter on the negotiated deal is Merrill Lynch & Co. The large underwriting team also includes Citi, M&T Securities Inc., RBC Capital Markets, Siebert Brandford Shank & Co., Banc of America Securities LLC, Barclays Capital, Goldman, Sachs & Co., JPMorgan, Loop Capital Markets LLC, Morgan Keegan & Co., Davenport & Co., Fidelity Capital Markets Services, Folger Nolan Fleming Douglas Inc., Jackson Securities, M. R. Beal & Co., Raymond James & Associates, Stifel, Nicolaus & Co., and Wachovia Securities.
Public Financial Management Inc. of Philadelphia is financial adviser on both transactions. McKennon Shelton & Henn LLP is bond counsel.
Merrill Lynch released a retail pricing scale Friday afternoon on $410 million of GOs. Bonds maturing in 10 years offered a 5% coupon and a yield of 3.13%. The longest maturity was in 2024 with a 5% coupon yielding 4.06%.
Maryland last sold GOs on July 16, 2008. In that competitive transaction, Banc of America bought the bonds with a 3.86% true interest cost. The 10-year maturity had a 5% coupon yielding 3.65%.
Deputy state treasurer Howard Freedlander said Maryland decided to go negotiated for the bulk of the bond package for several reasons.
"One, we believe that the time is right to do a negotiated deal," he said. "Other negotiated sales in other triple-A rated states have done rather well. And we know the institutional market is lagging."
In addition, Freedlander said that the state had been getting inquiries from citizens who hoped to buy up some of the state's highly rated paper. "So, yes, now they can," he said.
Freedlander said the state created a Web site - www.buymarylandbonds.com - to offer a guide to retail investors who may not be familiar with purchasing tax-exempt bonds.
Moody's Investors Service, Standard & Poor's, and Fitch Ratings all give the deal and the state's outstanding GOs a triple-A rating with a stable outlook.
"Naturally, I am very pleased that Maryland has retained its coveted triple-A rating, which testifies to the state's prudent and sound financial management," Treasurer Nancy K. Kopp said in a news release. "That's great, but so is our precedent-setting retail sale, something we are doing in response to numerous requests during the past several years to make our general obligation bonds more directly available to our citizens. In a period of widespread credit concerns, we expect Maryland bonds to be attractive to both retail and institutional investors."
Kopp noted that other triple-A rated states such as Georgia, Delaware, and Virginia have recently done negotiated transactions.
Proceeds of the Series A and C bonds will be deposited into a state and local facilities loan fund, which is divvied out to projects related to education, health and hospitals, public safety, the environment, housing, and utilities, according to the preliminary official statement. Proceeds of the Series B refunding GOs will refund Series 1999 and 2000 GOs.
"Maryland does not use general obligation bond proceeds to close budget gaps or fix cash-flow problems," Kopp said. "During the past several years, more than 60% of the proceeds of Maryland general obligation bonds have been used to finance the construction of public schools and higher education facilities in our state."
Maryland had not been immune to the economic downturn. Gov. Martin O'Malley is now working on a fiscal 2010 spending plan in which he will have to close a $2 billion gap with layoffs and spending cuts.
"As we work to bring Maryland through this national recession quickly and efficiently, we do so with renewed support from the federal level," O'Malley said in a news release. "We will continue to make our state government more accountable and efficient even as states across our county struggle to balance their budgets in these tough economic times."
To date, Maryland has cut more than $347 million from the fiscal 2009 budget and O'Malley is proposing an additional $153.8 million in spending cuts as part of his fiscal 2010 budget.
In total, the state expects nearly $672 million of one-time resources to be used to fund fiscal 2009 general fund expenditures and provide added resources in fiscal 2010. Maryland will close fiscal 2009 with the general fund balance declining by $63 million to $424.1 million and the state reserve fund totaling $701.1 million.
The state's total reserves are estimated to be 7.7% of spending, a level that Standard & Poor's said it considers good and is in part due to Maryland's high ratings.
"The rating reflects what we view as the state's diverse, broad-based economy, which has historically outperformed the national economy," analyst Richard Marino said in a ratings report.
Wealth and income levels, coupled with unemployment that remains below the national average, a long history of prudent fiscal management, "including making difficult fiscal decisions to restore structural budget balance when necessary," are strong points, according to the Standard & Poor's report.
Also contributing to the state's high marks, it said, are the low debt burden, which has a clearly defined debt-affordability model limiting annual issuance, and maintaining debt ratios within reasonable limits, including a constitutional 15-year debt maturity schedule.
Maryland is one of only seven states with a gilt-edged rating. Standard and Poor's has rated the state's debt triple-A since 1961, Moody's has done so since 1973, and Fitch has done so since 1993.