Michigan State Building Authority deals to save money and shed risk

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The Michigan State Building Authority hits the market as soon as next week with a deal to shed some floating-rate risks, bank interest rate savings and fund state capitol building upgrades.

The deal offers $228 million of tax-exempt new money and refunding bonds and $561 million of federally taxable but state tax-exempt refunding. Another $33.3 million tax-exempt variable-rate series will sell the following week.

The Michigan State Capitol in Lansing is undergoing some bond-financed upgrades.

The roughly $100 million of new money will finance 10 projects at state colleges and universities and state facilities including $39 million of upgrades to the Michigan State Capitol building that dates back to 1879.

The project funding lawmakers approved in 2017 calls for the restoration of decorative paint and historic furnishings, replacement of rusted and leaking pipes, energy efficiency updates, and lighting, life safety and fire system renovations.

The remainder will pay off commercial paper and advance and current refunding debt. About $140 million is being moved to a fixed from a floating rate.

“The refinancing of the prior bonds will reduce the authority’s reliance on third party liquidity and generate significant debt service and lease savings,” the state tells potential investors in a presentation. After the sale, nearly 99% of a $2.9 billion debt portfolio will be structured with a fixed rate.

Jefferies LLC is senior manager and Wells Fargo Securities is co-senior on the $561 million and $228 million series with Barclays Capital Inc. serving as senior on the $33.3 million of floating-rate remarketing refunding tranche.

Fitch Ratings rates the bonds AA-minus with a stable outlook and Moody’s Investors Service rates them Aa2 with a stable outlook.

They are notched one level off the state’s general obligation ratings because they are secured by a pledge and first lien on state lease payments for all facilities owned by the SBA under a 2003 master indenture subject to an annual legislative appropriation. The authority finances the projects with bond proceeds, leases them to the state and pledges those payments to debt repayment.

The legislature is contractually obligated to appropriate lease payments annually and the Michigan Supreme Court has issued an advisory opinion supporting the structure. The authority's bonds are also backed by a debt-service reserve fund holding $37 million.

About 54% of the historical portfolio of financed lease facilities are universities with 19% being various state facilities, 17% corrections facilities, and 11% community colleges. Leases that secure the bonds total about 160 properties.

While the ratings are linked off the state, the authority enjoys some insulation from the state’s fiscal woes given the legal structure of the bonds but the market is still watching for how the state will make up for tax blows caused by the COVID-19 economic shutdown and recession not covered by federal CARES Act or other funds.

“We do not see any material immediate credit risks for the Michigan State Building Authority's securities,” Moody’s said. “However, the situation surrounding the coronavirus is rapidly evolving and the longer-term impact will depend on both the severity and duration of the crisis.”

The state closed a $3 billion gap in the current budget that runs through September through a mix of measures such as a hiring freeze, budget cuts and tapping unspent non-general fund balances while $350 million was drawn from reserves, $550 million withheld from local governments, and $450 million drawn from federal aid.

The market is awaiting details on how the state will manage a $3 billion projected revenue and spending gap heading into fiscal 2021 beginning Oct. 1.

The state’s consensus forecasting group will meet later this month to release an updated revenue forecast that will guide the 2021 budget.

S&P Global Ratings, which does not rate the sale but assigns Michigan its AA GO rating, in July moved its outlook to negative.

"Our negative outlook also reflects difficult fiscal decisions ahead for Michigan as it deliberates the fiscal 2021 budget and beyond," said S&P analyst Ladunni Okolo.

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Primary bond market State of Michigan Refunding bonds Sell side Michigan
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