North Carolina can expect strong bids for its triple-A bonds

Gilt-edged North Carolina plans to price the second tranche of Connect NC infrastructure bonds on Wednesday.

Electronic bids for $400 million of general obligation public improvement bonds will be taken on Ipreo’s BiDCOMP/PARITY System by State Treasurer Dale R. Folwell, according to bond documents.

Alan Schankel, a managing director on Janney Capital Market’s fixed income strategy team focusing on municipal research and strategy.

The bonds carry triple-A ratings from Fitch Ratings, Moody's Investors Service and S&P Global Ratings. All have stable outlooks.

As the only state GO deal on the calendar, North Carolina’s bonds should attract significant demand from high-grade investors, according to Alan Schankel, managing director at Janney Montgomery Scott.

“I think demand for the North Carolina deal will be very strong,” he said. “There is a lot of money — redemptions and fund inflows — chasing limited supply.”

Bond proceeds will be used for various capital needs, including $238.2 million at state universities, $66.7 million at community colleges, $53.4 million for local parks, $7.6 million for National Guard projects, $25.6 million for agricultural projects, $4.6 million for state parks and attractions, and $4 million for public safety projects.

The deal is expected to be structured with level annual serial maturities between 2019 and 2038, per the preliminary official statement. Bidders can designate up to two term bonds from consecutive annual principal amounts.

Bonds maturing on or after June 1, 2029 may be redeemed before their maturities in whole or in part on at the option of the state, in a redemption price equal to 100% of the principal amount together with accrued interest.

Davenport & Co. LLC is the state’s financial advisor. Womble Bond Dickinson LLP is bond counsel.

Folwell said he was pleased that the three bond rating agencies reaffirmed the state's AAA bond ratings with analysts “noting the state’s strong economy, growing reserves and conservative fiscal management.

“Having these AAA ratings ensures that we can borrow money at the lowest possible rates, which results in the state having more buying power,” he said.

North Carolina is one of 13 states that have AAA ratings from the three rating agencies, Folwell said.

The state has $2.44 billion of outstanding GOs.

The 2018 bonds represent the second tranche of the $2 billion in Connect NC bonds approved by voters in March 2016. The same year, the state issued the first series of $200 million.

S&P said its GO rating reflects its view that North Carolina has a diverse economic base that is expanding ahead of the nation and that the state has a long history of prudent fiscal management.

The state also has a low-to-moderate debt burden with rapid amortization, well-funded pension system, and state borrowing that is subject to debt-affordability guidelines, a factor S&P said is important for a growing state.

North Carolina State Treasurer Dale Folwell

“In November 2018, voters will need to decide on a constitutional amendment to decrease the state's maximum allowable income tax rate to 7% from 10%,” S&P analyst Timothy Little said. “In our opinion, a reduction in the maximum allowable income tax rate to 7% may create unnecessary budgetary challenges should the state experience significant fiscal stress in the future.”

Little also said the proposed constitutional amendment comes several years after the state began reducing its income tax rates and expanding its tax base. The state moved to a flat tax rate of 5.8% in 2014. On Jan. 1, 2019, the state budget provides for lowering the personal income tax rate to 5.25% from 5.499%.

“Given the current distance of the personal income tax rate from the proposed maximum allowable rate, we do not expect voter approval of the [tax rate] reduction to have a rating impact,” Little said. “For fiscal 2017, individual income taxes were the state's largest general fund revenue source, 52.9%, followed by sales and use taxes, 31%.”

The year the General Assembly passed a bill signed by Gov. Roy Cooper implementing the Build NC Act of 2018. It provides for the issuance of special indebtedness up to $300 million per year for 10 years to finance transportation projects.

The Build NC bonds will be payable from annual appropriations by the General Assembly, although the state intends to make debt service payments from the State Highway Trust Fund.

Lawmakers also considered bills during this year’s session that would have requested voter approval to issue $1.9 billion of GOs for public school building projects. The bills didn’t make it out of committee.

Cooper, who is pushing for the bill next year, has said North Carolina voters have not had a statewide school bond referendum since 1996. He said a 2016 study pegged statewide school building and infrastructure needs at more than $8 billion.

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Primary bond market General obligation bonds Infrastructure Buy side North Carolina
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