New York will begin using a new vehicle to issue state debt, starting with a $1 billion October deal.
The Dormitory Authority of the State of New York will price the sales-tax backed revenue bonds the week of Oct. 17, said New York Division of Budget spokesman Morris Peters.
New York has used many different kinds of bonds to borrow, but will now instead focus on three: personal income tax bonds, general obligation bonds and this new sales tax bond.
“We think that consolidating our debt issuances into higher-rated credits with better yields, such as these new sales tax revenue bonds, will increase efficiencies and lower our cost of borrowing,” Peters said.
“There’s always been a good market for New York bonds and they provide favorable yields for the state,” Peters said. “We think that these new sales tax-backed bonds will be another attractive option for investors. It’s a win-win.”
Local Government Assistance Corporation, Dormitory Authority Mental Health, Thruway Local Highway and Bridge, MTA Service Contract, EFC Environmental Infrastructure and many other bonds will fade away.
The state sales tax revenue bonds, series 2013A, will be sold on a negotiated basis, with JPMorgan as the lead underwriter.
Proceeds of the new money deal will finance or reimburse all or a portion of state capital projects. These projects include the State University of New York education facilities, City University of New York senior college and community college facilities, state grants to libraries, hazardous waste remediation sites, and other environmental projects.
Projects at SUNY will include construction of a new 130,000 square foot cancer center at SUNY Upstate Medical Center, a new SUNY Brockport academic building, and a new SUNY Cortland student life center.
SUNY will also use the money for renovations and additions to the SUNY Oswego science, engineering and technologies building and other capital projects.
Standard & Poor’s and Fitch Ratings will rate the bonds. While the agency’s reports were not ready as of press time, they are expected in the week of Sept. 30.
A New York government source said he expected the bonds to be awarded the same rating as the state’s personal income tax bonds. The PIT bonds are rated AAA by S&P and AA by Fitch.
By comparison, the state’s general obligation bonds are rated AA by S&P and Fitch and the equivalent Aa2 by Moody’s Investors Service. The bonds will not be insured.
Hawkins, Delafield & Wood and Bryant Rabbino are the bond counsel. AC Advisors is the financial advisor for DASNY. Public Resources Advisory Group is the financial advisor to the New York division of the budget.
The bonds will have both serial and term maturities. While the maturities have not yet been decided, the approved bond resolution set a maximum maturity of 30 years.
The bonds will be callable but the call date has not yet been decided on, said DASNY public information officer John Chirlin.
Interest rates will be fixed and the coupons will be tax-exempt, Chirlin said.
New York has sold sales tax bonds in the past but not recently, a New York government source said.
This new bond structure is being sold now because the division of budget came up with the idea and then the state legislature approved it as part of the 2013-2014 budget.
The legislation authorizes the use of the sales tax bonds for refinancing, but there are no current plans.
The legislation created a sales tax revenue bond tax fund to provide payments for the bonds. The fund will receive a 1% sliver of receipts from the state’s 4% sales tax, or one quarter of these receipts.
After payments are made for the Local Government Assistance Corporation, the sales tax fund will get a 2% sliver. Tax revenue in excess of debt service requirements will be transferred to the general fund.
The sales tax fund “will have the same strong appropriation incentive and bondholder protections features as PIT and LGAC bonds,” the New York State capital plan said. “A locked box’ feature will preclude transfers back to the general fund in the unlikely event of non-appropriation or non-payment. In addition, a general fund reach back’ will be provided in the unlikely event that revenues are insufficient to pay debt service.”
The sales tax bond “makes perfect sense New York is using the lowest cost of financing available to them in the market,” said Scott Cottier, senior portfolio manager at Oppenheimer Funds.
Investors will also be happy about the new bond type, analysts said.
“I think use of dedicated sales tax revenue stream to support borrowing, as in the case of New York, is likely to increase,” said Janney Capital Markets managing director Alan Schankel. “Given the fate of GO bond holders (and insurers) in Detroit and Harrisburg bonds, investors are becoming increasingly biased towards bonds backed by dedicated revenues. Perhaps ironically, this type of structure further diminishes GO debt, since as tax revenue is redirected to back new bonds, it becomes unavailable for general fund purposes, including GO debt service.”
Schankel also noted that on Sept. 25 the Puerto Rico Government Development Bank and Treasury announced the government was introducing legislation to expand the portion of the island’s sales tax devoted to its sales tax bonds. The sales tax “COFINA” bonds are Puerto Rico’s bonds with the highest rating from the bond rating agencies. Puerto Rico plans to use the additional funds to sell more of the COFINA bonds in the near future.
Puerto Rico’s expansion of the COFINA bonds “is further evidence of investor preference for dedicated tax revenue security,” Schankel said.
HJ Sims & Co. director of credit analysis Dick Larkin said the new bond issuance vehicle would help some investors meet portfolio diversification targets.
“I am sure that the market will differentiate this from other state level bonds like state GOs or PIT bonds, but that partly will be because as technically a new issuer of bonds, it will allow institutional investors to buy these securities in addition to their NY State GO or PIT holdings if they are subject to a single-issuer limit in their portfolio,” Larkin said.
“Since we are dealing with a creditworthy state with an already high bond rating, the new sales tax structure doesn’t really do anything for me as a credit analyst.”