Massachusetts will head to market in the next two weeks with $538.8 million of SIFMA-index general obligation debt that will refinance Series 2005A variable-rate bonds.
Citi provides a line of credit on the Series 2005A bonds, with the liquidity facility set to expire March 29. The state has opted for refinancing the variable-rate bonds into SIFMA-index bonds rather than replacing the liquidity facility. Selling SIFMA bonds will help diversify the state’s outstanding variable-rate bonds and broaden its investor base to attract short and intermediate bond funds, said Colin MacNaught, the state’s assistant treasurer for debt management.
Officials are looking to price the SIFMA refunding bonds next week or the following week, he said.
Morgan Stanley is book-runner on the Series 2010A SIFMA bonds. Edwards Angell Palmer & Dodge LLP is bond counsel. Standard & Poor’s and Fitch Ratings rate the GOs AA and Moody’s Investors Service assigns an equivalent Aa2.
Massachusetts has $17.2 billion of outstanding general obligation debt, according to Moody’s.
The Series 2010A bonds offer serial maturities in 2011 through 2014, according to the preliminary official statement. Officials anticipate rolling over or refinancing the bonds when they mature to follow the original maturity schedule of the Series 2005A bonds, which extends to 2028.
“The 2010 Series A bonds are expected to mature serially on Feb. 1, 2011-14, to be finalized based on market conditions at pricing, but the commonwealth intends to undertake refinancings to maintain the amortization of the Series 2005A variable-rate demand bonds that are being refunded with this offering,” according to a Fitch report. “The Series 2005A bonds have a final maturity in 2028.”
The state will attach existing floating-to-fixed rate swaps with a notional amount of $536.6 million to the Series 2010A SIFMA bonds to offer a synthetic fixed rate on the debt. The swaps currently align with the Series 2005A bonds. In those agreements, Massachusetts pays fixed rates ranging from 2.925% to 4% and receives from Citi, the counterparty, a floating rate based off of the SIFMA index, according to the POS.
Market analysts said investors in general are not as familiar with SIFMA-index bonds compared to variable-rate demand bonds or fixed-rate debt, but the lack of variable-rate bonds in the market could generate interest from investors looking for such securities. In addition, pairing the SIFMA bonds with a SIFMA swap, as opposed to a derivative based off of the London Interbank Offered Rate, could help to avoid any potential deviation between SIFMA and Libor.
“It certainly decreases the issuer’s risk of divergence, so the structure is maybe less concerning from a credit-quality perspective,” said Guy LeBas, chief fixed-income strategist at Janney Capital Markets.