Ohio Keeps Up Selling Streak With $146M

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CHICAGO — Ohio will sell $146 million of general obligation bonds Monday in a transaction that includes $120 million of new-money taxable Build America Bonds and just under $26 million of fixed-rate tax-exempt refunding bonds.

It's the latest in a flurry of deals for the Buckeye State, which is traditionally an active issuer but maintains a moderate debt burden compared to other states. Ohio and its state agencies entered the market nearly every month last year, and have several more borrowings — as well as ballot proposals to take on more debt — on tap for the spring and summer.

"We've been busy," said Larry Scurlock, the state's assistant debt manager.

Like other states, Ohio continues to suffer from declining revenue amid a weak economy. To provide some relief in its current two-year, $52 billion budget, the state recently completed three of four planned debt restructurings that are projected to provide $740 million in near-term cash flow by delaying debt-service payments originally scheduled for this year and 2011 until 2012.

The Ohio Public Facilities Commission will act as issuer on the transaction, which will price Monday and Tuesday.

Goldman, Sachs & Co. is senior manager on the deal. Citi is co-senior manager. Seven co-managers complete the underwriting team. Public Financial Management Inc. is financial adviser.

The state expects to see substantial savings by issuing direct-subsidy BABs in lieu of traditional tax-exempt debt, according to Scurlock.

Officials expect to save about 36 basis points, or $4.9 million, by using the federal government's BAB program. By refunding several maturities of debt that are nearing their call dates, the state expects to see a roughly 4% net present-value savings, Scurlock said.

Proceeds from the upcoming GO sale will be used to finance the state's loans and grants to local governments for capital improvement projects. The state generally issues $120 million annually for the program, Scurlock said.

"It's a very popular program and well utilized among all of Ohio's communities," he added.

The bonds are backed by Ohio's general revenue fund, which includes nearly all the state's revenue.

Rating agencies based their ratings on the state's credit. Moody's Investors Service rates the debt Aa2 with a negative outlook, and Fitch Ratings rates it AA with a stable outlook. Standard & Poor's maintains a AA-minus rating on the GOs, which have had a negative outlook since September.

Analysts warned that Ohio could have a tougher time than other states in recovering from the recent recession due to erosion in the manufacturing industry.

Last week state budget officials said tax collections in January fell nearly $150 million below estimates, largely due to a steep and unexpected decline in personal income taxes.

The revenue has come in $99.5 million below projections since the start of the fiscal year last July.

While noting the state's traditionally strong governance and prompt measures to cover shortfalls, credit analysts said the lack of a formal revenue estimating process is a weakness in Ohio's efforts to address revenue gaps.

To balance the most recent two-year budget, Gov. Ted Strickland — a Democrat who faces re-election this year — and lawmakers drained the state's $1 billion rainy-day fund and relied on $2.4 billion in federal stimulus money.

"The long-running structural changes affecting Ohio's economy indicate that the state may not recover jobs in tandem with national trends as the recession abates," Moody's analyst Edward Hampton wrote in a report on the upcoming bond offering.

Moody's negative outlook — assigned last August after the agency downgraded the state in June — reflects in part Ohio's "growing reliance on non-recurring measures and likely continuation of economic performance that will make it harder for the state to rebuild financial reserves even as the national economy recovers," Hampton said.

Other nonrecurring revenue-generating measures were the four debt restructurings, three of which have already been done. For its fourth and final deal, the Ohio Building Authority will restructure $130 million of debt in August, officials said.

The restructuring does not push out final maturities beyond the original bond maturity, preserving the state's rapid amortization rate on its tax-supported debt. All of its debt matures within 20 years, and nearly 80% of the debt amortizes in 10 years, according to Fitch.

The state plans to issue a yet-to-be-determined amount of highway bonds next month, followed in April by roughly $215 million of grant anticipation revenue bonds.

In the same month, the state will issue around $20 million of so-called Innovation Ohio bonds, which are backed by a pledge of the state's liquor profits and are used to finance investments in technology research by local businesses.

The state is also preparing to issue roughly $50 million of bonds in June, part of a voter-authorized issuance of $200 million to fund bonuses to veterans of recent wars. The bonds will be issued over the next three years.

In May, voters will decide whether to approve a request to issue $700 million of GOs to finance a jobs program for the next five years.

With a total of $10.7 billion of tax-supported debt, Ohio benefits from a relatively modest debt burden, ranking 23d among states for tax-supported debt as a percentage of personal income.

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