Oregon prices into market eager for quality taxables
Oregon’s longtime debt manager Laura Lockwood-McCall said Wednesday’s $320.4 million taxable general obligation bond sale was one of the best deals that she has ever priced.
That is saying something, given Lockwood-McCall has been the state's director of debt management for 16 years and has worked as a muni issuer since the late 1980s.
Citi and Morgan Stanley were co-senior managers on the deal, which Lockwood-McCall said was oversubscribed 7.7 times in some maturities. PFM was municipal advisor and Hawkins Delafield & Wood was bond counsel.
At the same time, Oregon also priced $80 million of tax-exempts, a mix of new money and refunding.
The state sold three tranches of taxable refundings to capitalize on the extremely low interest rates, 1% or 2% on some maturities, Lockwood-McCall said. The $320 million of taxables also includes $95.3 million of green GOs to support its affordable housing program, she said.
The state achieved $26 million in present value savings on the taxable refunding, Lockwood-McCall said, which more than twice the $10 million in present value savings the state was anticipating two weeks prior to the sale, she said.
"That is why we are pretty excited," she said.
The robust investor interest enabled the finance team to tighten yields, Lockwood-McCall said.
On the new money green bonds, Lockwood-McCall said though those bonds were certified as green, the finance team weren’t aware of any additional investor interest, or “green premium,” realized from that designation.
Oregon's GO ratings of Aa1 from Moody’s Investors Service and AA-plus from both Fitch Ratings and S&P Global Ratings were affirmed ahead of the deal, along with stable rating outlooks.
Though Lockwood ticked off all the reasons that investors might be interested in investing in the state’s double-A bonds, she said the interest from such a diverse group of buyers probably "has a lot to do with larger macro-economic forces."
Other issuers that priced Wednesday also benefited from a continuing supply-demand imbalance.
The Oregon deal was originally set to price in May, but the finance team decided to postpone given the market volatility resulting from the pandemic. The delay enabled the state to include the Oregon Office of Economic Analysis May 20 revenue forecast for June in the offering documents, Lockwood-McCall said.
“I am glad we waited,” Lockwood-McCall said. “By waiting for the revenue forecast to come out from the state, we had extensive disclosure in our preliminary offering statement about the impacts of COVID-19.”
Oregon has “one of the lowest per capita levels of infection,” Lockwood-McCall said. “We do have less testing, but we also have lowered costs around treatment, because we have managed care here,” equating to lowered costs for the state.
Oregon’s debt management team has been a leader around pension disclosure, even before changes were made requiring those liabilities be included on balance sheets. The bond counsel the state works with most often chairs a pension group for the National Association of Bond Lawyers, she said.
The state forecast that it will take in $2.7 billion less in the current two-year budget than it projected in March, but according to Fitch analyst Alan Gibson, lawmakers have taken the necessary steps to account for the revenue loss.
One of the key elements in the state retaining its rating and stable outlook was that it had ample reserves before the pandemic struck, Gibson said.
The state had expected to have $1.1 billion in excess cash headed into the pandemic that will help cover the gap. It also will have record reserve funds of $1.75 billion by the end of this budget cycle.
Oregon has also received nearly $1.4 billion in federal aid from the $2 trillion CARES ACT, but some of that money will go to counties and cities.
Gov. Kate Brown had responded to the May forecast with a plea to Congress to dedicate more money to state relief.
"Make no mistake, the budget gap created by this pandemic is too large to bridge without additional congressional action," Brown said.
Those reserves are providing a buffer for the state in the fiscal 2019-20 biennium, Gibson said.
State lawmakers have also done a good job of laying the foundation to cut 17% of expenditures, though they may not need to make cuts that steep to balance the budget, Gibson said.
As a state that produces a two-year budget, they also have the remainder of the biennium to make adjustments, he said. It runs through June 30, 2021.
“They are not doing it in the context of a one-year budget cycle,” he said.
The state forecast projects slower growth next year due to uncertainty over virus and income losses, but once medical treatment is widely available, a stronger recovery is expected with the economy returning to health around 2025.
Like other states coming into the economic downturn with some resilience, analysts will be watching how the state plans to deal with the next two budget cycles going out to 2024, Gibson said.
The state’s economists also forecast in the May report more difficult budget decisions in the out years with $4.4 billion less than anticipated in the budget running from 2021-23, and $3.3 billion less than expected in the budget after that.
Oregon’s economy is exposed to more volatility than some other states, Gibson said, because of its exposure to personal and corporate income taxes leading to boom and bust cycles.
But the stock market correction is expected to be less than half as deep, and less than half as long as in 2007, according to the state's economic forecast.
Fitch also cited its high exposure to international trade as a potential ratings challenge.