BRADENTON, Fla. — Florida sold its first competitively bid taxable Build America Bonds last week, saving the state a considerable sum, said Ben Watkins, who has now become a solid believer in the federal stimulus bond program.
Watkins, director of the Florida Division of Bond Finance, was an early skeptic who felt the BAB structure would not be attractive to some muni bond issuers. But after the most recent of several successful BAB sales, Watkins said he’s changed his mind.
Florida last Thursday competitively sold two series of new-money public education capital outlay bonds as $42 million of tax-exempts and $144.5 million of BABs for a gross savings of $37 million over a strictly tax-exempt sale.
The $42 million of Series F tax-exempt noncallable bonds priced to yield 1.55% in 2013, 2.35% in 2016, and 4% in 2019, the final year of maturity. Of the eight bidders, the deal sold to UBS Financial Services Inc. at a true interest cost of 2.44%.
The $144.5 million of taxable Series G BABs, which are callable in 10 years, priced to yield 4.35% in 2020, 5.6% in 2030, and 5.75% in 2029, the final year of maturity. Of the five bidders, the deal was awarded to Merrill Lynch & Co. at a true interest cost of 5.56%.
The bonds were rated AA-plus by Fitch Ratings, Aa1 by Moody’s Investors Service, and AAA by Standard & Poor’s. Bond counsel was Squire, Sanders & Dempsey LLP.
Under the BAB program, issuers receive an interest subsidy from the federal government. After the 35% federal subsidy from the U.S. Treasury, the BAB portion of the deal carries a 3.52% interest rate over the life of the bonds.
“That’s pretty low for 30-year money,” Watkins said. “At the end of the day my net cost on that whole loan is a little better than 3.5% on a 30-year loan. That’s why BABs are so popular.”
If the entire offering had sold as tax-exempt bonds, Watkins said the true interest cost would have been around 4.25%, or about 75 basis points more, which equates to gross debt service savings of $37 million.
Not long after the American Recovery and Reinvestment Act was enacted in February, Watkins felt there could be impediments to using BABs because of conventions in the taxable market such as investors’ penchant for bullet maturities.
As the bonds gained in popularity, Watkins said “market conventions have moved in our direction.”
The changes enabled him to use an amortizing structure without bullet maturities, resulting in level debt service, and he can keep the 10-year par call normally used on a tax-exempt transaction.
Watkins said the state could have saved more on last Thursday’s deal but he was not willing to sell the call rights.
“That’s making a 30-year bet that the federal government is not going to change this program, and I’m not willing to make that bet,” he said. “I’ll accept that level of risk for 10 years, but not 30 years.”
Watkins, who is a big believer in competitive sales, does not think the days of selling on a negotiated basis are over, especially for lesser-known credits that need more marketing.
“We need to have the right credit to sell to get the kind of result that we got on this competitive BAB transaction,” he said.
Watkins expects to be back in the market with another BAB offering in a month or so, selling $300 million to $350 million for prison construction.
Since the start of Florida’s fiscal year July 1, Watkins’ agency has sold more than $800 million of public education capital outlay refunding bonds in four transactions. Without extending maturities, he said those deals garnered about $82.6 million in present-value savings.
