The New Jersey Economic Development Authority will sell more than $2.2 billion in bonds and notes Wednesday.
The issue is rated A-plus by Fitch Ratings, A1 by Moody’s Investors Service and A-plus by Standard & Poor’s. Fitch and Moody’s have stable outlooks on their ratings while S&P assigns a negative outlook. The debt is neither insured nor backed by a bank letter of credit.
The securities are being sold in three series. Series 2013 NN bonds will consist of $1.643 billion in tax-exempt bonds. Series 2013 OO bonds will consist of $189 million of taxable bonds. Series 2013 I will consist of $381 million of tax-exempt SIFMA index notes.
Had this issue appeared in 2012, its $2.213 billion price tag would have been last year’s fourth-largest issue.
The securities are being sold via negotiation. Bank of America Merrill Lynch is the senior manager. More than a dozen other firms are co-underwriters. The authority has no financial advisor but McCarter & English is serving as bond counsel.
As of Thursday the NJEDA had not determined maturities except to decide that none would go beyond 2035. This does not extend the maturities of the refunded bonds. The authority had also not decided whether the bonds would be term or serial. Some of the debt is expected to be callable, New Jersey Treasury spokesman Bill Quinn wrote in an email.
The securities are school facilities construction refunding bonds and notes.
The Series I notes will bear interest at a floating rate based on a fixed spread over the SIFMA index of tax-exempt variable-rate issues. Interest on the notes will be payable on the first business day of the month commencing March 1, 2013.
Along with advance refunding previous bonds and notes, the money from the sale will be used to terminate the earlier bonds’ and notes’ swap agreements. Among the bonds being refunded are Series 2004J and Series 2007T bonds.
“Since we knew we had to issue bonds or notes in advance of the maturing of $750 million in floating-rate notes in June 2013, we began considering refunding options last year,” Quinn said. “Through discussions with our underwriter, we developed the current financing plan and we decided to move ahead with it at this time to take advantage of favorable interest rates and strong investor demand.”
Quinn said the authority expected to have $28 million in net present value savings from the sale.
The NJEDA’s payment of principal and interest will be paid based on a contract with the New Jersey treasurer. Each year lawmakers are expected to approve payments to the authority for repayment. However, “the state legislature has no legal obligation to make any such appropriations,” according to the issue’s preliminary operating statement.
In explaining its A-plus rating, Fitch pointed to six key factors: “Payments must be appropriated annually by the state legislature, resulting in a rating one notch below the state’s AA-minus general obligation bond rating; the state has “considerable” debt and unfunded pension and employee benefit liabilities; while the state has started a plan to address pension funding shortfalls, for the medium term Fitch anticipates these shortfalls to continue; the state has a wealthy populace but suffers from higher than national average unemployment; and revenues through November have been short of the state’s expectations, both because of overly optimistic predictions and because of Hurricane Sandy’s impact.”
Fitch expects the state’s reserve balances to “remain narrow.” "The governor has strong powers to implement any necessary expenditure reductions to balance the budget and the state has a record of doing so.”
“Fitch assumes the state will ultimately receive Federal Emergency Management Agency aid at a level similar to hurricane relief offered during past disaster responses,” Fitch primary analyst Marcy Block wrote.
To explain its A1 rating, Moody’s pointed to very similar factors.
“Almost 90% of the debt service on the state’s net tax-supported debt is subject to appropriation,” Moody’s lead analyst Edward Hampton wrote. “The essentiality of the authority’s school facilities financing program and the importance of maintaining access to the capital markets provide strong incentive for the state to make these appropriations.”
“One of the primary goals of the current transaction is to reduce risk associated with a large portfolio of derivatives and variable-rate debt,” Hampton wrote. “The authority estimates that the notional amount of derivatives associated with its school program will be reduced by $1.13 billion in total, or 49%, as a result of these transactions. The authority also will achieve a significant reduction in exposure to rollover risk from its variable-rate portfolio by $750 million in fiscal 2013 (the current year), by $231.4 million in fiscal 2015 and by $846.1 million in fiscal 2016.”
To explain its A-plus rating, S&P also pointed to factors similar to those of Fitch.
“The negative outlook is based on our concerns over New Jersey’s inability to achieve structural balance and growing fiscal pressures,” S&P primary credit analyst John Sugden wrote. “The negative outlook also reflects what, in our view, are optimistic revenue assumptions, continued reliance on one-time measures to offset revenue shortfalls and expenditure growth, and growing expenditure pressures associated with pension funding increases, Medicaid, debt service and others in fiscal 2013 and thereafter. For fiscal 2014, the state has already identified approximately $2.2 billion in budgetary gaps that would need to be closed. These amounts do not include the expected impact of increased enrollment in Medicaid due to the Patient Protection and Affordable Care Act of 2010. The impact of Superstorm Sandy adds increased uncertainty to the state’s revenue picture.”