CHICAGO — Top-rated Minnesota plans to enter the market twice this summer, beginning early next month with the competitive sale of $865 million of new-money general obligation bonds and then in September with the negotiated sale of between $500 million and $1 billion of refunding GOs.
All the tax-exempt, new-money debt carries the state’s GO pledge but $635 million is being issued as various-purpose bonds to be repaid with general funds and $225 million as trunk highway bonds supported by the state’s transportation fund. Another taxable $5 million series is included to fund the state’s rural finance program. The state will take competitive bids on Aug. 3. Proceeds will finance projects in the state’s bonding bill packages approved over the last several years.
Minnesota has yet to name an underwriting team for the refunding issue, which would sell as soon as mid-September, and has not settled on a size due to fluctuating interest rates. “We’ve asked our underwriting pool for updated candidates for the refunding, and we are interested in seeing how underwriters perform on the competitive deal before we name a team. One of the factors we look at is how firms support the state of Minnesota in terms of market offerings,” said debt manager Kathy Kardell.
Lawmakers last year gave Kardell the ability to sell GOs through negotiation for two years due to the market turmoil of 2008 and 2009. Kardell used a negotiated sale last year to hold a retail order period but she prefers competitive bidding on new-money issues in a stable market.
The state last year named six firms to its qualified pool of senior managers. They are Bank of America Merrill Lynch, Barclays Capital, Morgan Stanley, Piper Jaffray & Co., RBC Capital Markets, and Wells Fargo Brokerage Services. Another 10 firms are in the co-manager’s pool.
Public Resources Advisory Group is adviser on the GO sales. Dorsey & Whitney LLP is bond counsel.
Kardell, assistant commissioner for treasury, and management and budget commissioner Tom Hanson, the state’s top fiscal officer, traveled to New York yesterday to meet with rating agencies. Though the state has struggled with revenue collections like its neighbors, and has turned to one-time maneuvers to balance its budget, Kardell said she hopes analysts will continue to look favorably on the state’s conservative debt management.
“The refunding is for present-value savings. We are not doing any debt-restructuring gimmicks for budget relief,” she said. The state is rated AAA with a stable outlook by Fitch Ratings and Standard & Poor’s and Aa1 with a stable outlook by Moody’s Investors Service.
The state in the past has divided into two issues its new-money GO borrowing needed to finance capital projects in the state’s capital budgets, but Kardell said the state is consolidating its needs into one deal in 2010 given the low interest rate environment.
The state is hoping to draw strong investor interest in its high-grade paper that may have an added scarcity factor given the dwindling supply of longer-term tax-exempt offerings due to the popularity of the taxable Build America Bond program.
Minnesota sees limited value in the BAB program since its savings are typically for debt offered further out on the yield curve, and the state is limited to a 20-year maturity on its GOs. The state also is required to set aside debt service 18 months in advance so it would be forced to set aside a higher amount to cover the taxable interest rate long before it receives the federal interest subsidy.
The state’s latest economic update shows current revenues are tracking less than 1% below the latest budgeted estimates. Sales and corporate income taxes have picked up but individual income tax collections still lag.
Gov. Tim Pawlenty and lawmakers in May agreed on a plan that cut spending, including aid to local governments, and pushed off $1.8 billion owed to schools into the next budget cycle, to address a $3 billion shortfall in the $57 billion biennial spending plan that runs through next June.
To manage cash flow as taxes come in later in the fiscal year, Hanson told lawmakers at a hearing earlier this week that the state would delay tax refunds and aid payments to health care providers, as well as schools and universities. The state also plans to establish a $600 million line of credit that can be tapped if needed, a move favored by state finance officials over a short-term borrowing. The best bid came from U.S. Bancorp, but the state has not yet finalized a contract on the line, Kardell said.