WASHINGTON — North Carolina Tuesday expects to competitively price $494.6 million of general obligation refunding bonds, taking advantage of record-low tax-exempt interest rates to exit interest-rate swaps.
The bonds will refund variable-rate demand obligations issued in 2002. Today's deal will also pay $54 million in interest-rate swap termination fees to Goldman, Sachs & Co. and Bank of America Merrill Lynch, according to Moody's Investors Service.
The swaps had a combined $34.73 million negative fair value as of June 30, 2009, according to preliminary bond offering documents. The state has not had to post collateral associated with the negative fair values, said Kimberly Lyons, the lead analyst on North Carolina for Moody's.
The state pays 3.28% on one swap, expiring in 2019 and 3.09% on the other, which expires in 2019. It receives 64% of the London Interbank Offered Rate on each, according to the offering documents.
"It is not that much in general debt-service savings for them," Lyons said of the current deal. "I think the value here is getting out of those swaps."
North Carolina "is almost at its debt-capacity limit" for the year, meaning the state will likely be limited to refunding bonds for the rest of 2010, Lyons said. The state will have $1.6 billion of authorized appropriation-backed debt remaining after this issue, according to Standard & Poor's.
Womble Carlyle Sandridge & Rice PLLC and Robert J. Burford & Associates PLLC are co-bond counsel. FirstSouthwest is the financial adviser. The bonds, rated triple-A by Moody's, Standard & Poor's and Fitch Ratings, are expected to have one- to nine-year maturities.
The deal comes amid one of greatest savings opportunities for tax-exempt issuers.
On Monday, a 10-year tax-exempt bond yielded 2.39%, a record low, according to Municipal Market Data. When North Carolina issued debt in March, a triple-A tax-exempt bond yielded 3.09%. The state's March 31 deal had a 3.48% true interest cost on $487.7 million of GO bonds sold to Citi.
North Carolina "is obviously going to get good, low rates," said Ronald Schwartz, managing director at StableRiver Capital Management LLC. The 10-year Treasury on Monday rallied to 2.58%, the lowest yield since March 2009. With the drop in Treasury yields, the North Carolina's deal "looks, on a ratio basis, even a bit more attractive," he said.
To balance the fiscal 2011 budget, North Carolina lawmakers slashed spending by about $600 million and will be substituting state funds with about $343 million in federal Medicaid assistance dollars provided by an extension to the enhanced Federal Medicaid Assistance Percentages program.
Last week, President Obama signed legislation to extend the FMAP funds to states through June 30. The law will gradually lower the rate from its current high of 6.2% to 1.2% in the second quarter of 2011. The increased rates were originally set to expire at the end of the year.
North Carolina had expected to receive $519 million of Medicaid funds. It will also receive $298 million in education aid from the legislation, according to figures from the Center on Budget and Policy Priorities.
In April, officials revised the fiscal 2011 revenue estimate lower by $703 million. The state saw its first revenue decline on record in fiscal 2010, according to Standard & Poor's.
Still, North Carolina's triple-A rating distinguishes it from other municipalities struggling with budget deficits.
"Everybody knows there are no major issues with this sort of credit," Schwartz said. "In this sort of market environment that is a big plus because there are major fiscal pressures throughout the country."
