New York plans to start 2009 with a bang, bringing $1.1 billion of personal income tax bonds to a fickle market next week in what likely will be the largest deal to date in the new year.
The Empire State Development Corp. will issue the bonds, which will be both tax-exempt and taxable. A two-day retail order period begins on Tuesday, with institutional pricing beginning on Thursday.
The bonds will be marketed in two series, with each of those divided into two subseries of taxable and tax-exempt debt. Standard & Poor's rates the credit AAA.
Proceeds of Series 2009A-1 and 2009A-2 will be used for economic development and housing, with the tax-exempt A-1 having a par value of $348.1 million and the taxable A-2 a par value of $131.4 million.
Proceeds of the tax-exempt Series 2009B-1 and taxable 2009B-2 will be used for state facilities and equipment and have par values of $511.3 million and $107 million, respectively.
The state hasn't finalized the structure of the bonds, but "we are aware that investors have recently tended to demand somewhat shorter maturities," said Division of Budget spokesman Jeffrey Gordon.
"The market has been anticipating a good start to the new year," said Evan Rourke, portfolio manager at MD Sass. "You have a very favorable supply [and] demand dynamic because reinvestment flows are coming back on the market with Jan. 1 coupons and you usually don't get a lot of big deals at the beginning of the year."
Rourke said that the issuer may have looked at this as an opportunity to get a better price before more bonds hit the market. "You may run into an issue where there still seems to be some pent-up issuance that starts to come in mid- or late January, and it may change the playing field a little bit," he said.
Citi will be book-runner on the deal. Morgan Stanley, Merrill Lynch & Co., and Loop Capital Markets, LLC. will co-senior manage the deal. Winston & Strawn LLP is bond counsel.
The state has sold $12.9 billion of PIT bonds since 2002, according to Thomson Reuters.
Joe Darcy, senior portfolio manager at Dreyfus Corp., said retail investors were likely to continue to play a dominant role in a sale like this. "They've had a formidable appetite for bonds through the 10- to 15-year part of the curve, and I would suspect, given the nature of the credit, they're going to be there for this deal as well," he said.
However, the state could have more trouble selling PIT bonds to institutional buyers, Darcy said.
"It tends to trade cheap for what it is because everybody owns too much of it," he said. "If you looked at it simply on a credit structure basis, it's a fundamentally sound instrument, but in terms of capacity constraints, if people own too much of it, they're not able to pay the premium that the credit would otherwise command ... From a diversification standpoint, the need for other names is greater."
Between the national recession and plummeting Wall Street profits, New York is in a tough spot, facing a $1.7 billion deficit in the current fiscal year and a $13.7 billion deficit in fiscal 2010.
Gov. David Paterson earlier this month proposed a series a spending cuts and tax and fee increases to close those gaps, but he faces some challenges to get them passed.
"The current administration has been very proactive to deal with the current downturn and the executive budget proposal for fiscal 2010 relies on recurring solutions, so we'll see what the Legislature does with that," said Fitch Ratings senior director Laura Porter.
Fitch rates the PIT credit, which is backed by a statutory allocation of 25% of state personal income tax receipts, AA-minus with a stable outlook, which accounts for the cyclical nature of the state's economy, she said.
The state has projected that its coverage ratio on PIT bonds will fall nearly in half to 3.7 times in fiscal 2014, compared to 6.6 times in the current fiscal year, but that fact hasn't set off alarm bells.
"We've always expected the coverage level to be going down because it's now the main financing mechanism for New York State," Porter said. But "there's still so much coverage on these bonds."
Moody's Investors Service no longer rates the PIT bonds.