Gilt-edged Delaware Tuesday will sell $124 million of tax-exempt general obligation bonds that will refinance existing debt to generate present-value savings for the state.
Book-runner Morgan Stanley will offer retail sales Tuesday morning before opening up the deal to institutional buyers in the afternoon. Saul Ewing LLP is bond counsel. Public Financial Management Inc. is the financial adviser.
The transaction will offer serial maturities from 2011 through 2020, according to the preliminary official statement. Potential refunding candidates include Series 2002A, Series 2004A, Series 2005A, B, and D, Series 2007A, Series 2009A, and Series 2009B.
Delaware had $1.59 billion of outstanding general obligation debt as of Dec. 31, 2009, with 76% of that set to mature within 10 years. A third of that outstanding debt, $534.9 million, was issued for school construction on behalf of local districts.
“This debt is fully supported by the property tax revenues of those districts,” the POS reads.
Moody’s Investors Service, Fitch Ratings, and Standard & Poor’s all rate Delaware triple-A.
Since fiscal 2003, the state has been actively refinancing its outstanding debt for present-value savings.
Stephanie Scola, director of bond finance in the Department of Finance, said Delaware has been tapping into historically low interest rates and will continue that trend tomorrow. She anticipates the state gaining nearly 5% of present-value savings from the Series 2010A refunding.
“We’re trying to take advantage of what the market will give us in terms of debt service and interest costs. It’s certainly worthwhile to pursue,” Scola said. “I think most indications are that rates are going to rise. That’s why we wanted to take care of this one now.”
Scola said much of the debt being refunded has a July 1 call date and “that’s part of the reason for doing them now. And we’re just looking for other opportunities for interest savings.”
This week the tax-exempt municipal market should see more activity than the previous two weeks, said Alan Schankel, director of fixed-income research at Janney Capital Markets. That could help triple-A Delaware grab lower rates among buyers looking for top-rated debt.
“I think yields will hold steady next week and I don’t think prices are going to jump up that much,” Schankel said. “I think we’ll continue about where we are. If anything, ratios are on the high side right now and if we’re in a kind of a band, I think you could even see munis outperform Treasuries a little [this week].”
The state issued $313.6 million of Series 2009C tax-exempt bonds on Oct. 8. The bonds offered serial maturities from 2011 through 2027. Yields ranged from 0.8% with a 3% coupon in 2011 to 3.49% with a 5% coupon in 2027.
While Delaware’s $1.59 billion of outstanding debt is relatively large for its size, the state’s overall borrowing agenda is conservative. It only issues debt out to 20 years. The state has no variable-rate debt and no derivatives.
“Delaware has implemented various debt-management policies over time to decrease the state’s debt burden and limit bond issuance,” according to a Standard & Poor’s report. “These measures have been successful in reducing the state’s debt level despite the broad role the state maintains in funding capital requirements for education and corrections, which are more traditionally done at the local level.”
Like other states, Delaware has experienced a decline in revenues. It implemented spending cuts and tax hikes to help fill prior budget gaps, including a $800 million deficit in fiscal 2010. The financial services industry is one of the state’s largest employers.
“Delaware’s premier credit standing centers on its considerable economic and financial resources, supported by institutionalized protections designed to ensure surplus operations,” according to Fitch report. “The state’s economy, diversified through deliberate policies that created a climate attractive to banking and related business services and pharmaceuticals, is showing the effects of the deep recession as is much of the nation.”
In looking at its other long-term obligations, Delaware’s pension fund is fully funded. Conversely, its other post-employment benefit obligation is $5.6 billion.
“That’s a newer obligation and we are trying to manage it, not just with contributions as we do through the pension plan, but also managing the cost of the benefit,” Scola said. “And I think that’s something that we’re going to continue to do for a number of years.”
Upcoming new-money deals include a $60 million qualified school construction bond sale in the summer or fall followed by new-money GOs in the fourth quarter. Delaware typically spends $20 million per month on infrastructure, Scola said.
Lawmakers are working on a proposed $356.5 million fiscal 2011 capital budget, which will include pay-as-you-go financing. The Legislature is also working on Gov. Jack Markell’s $3.2 billion budget plan. Fiscal 2011 begins July 1.
That $3.2 billion budget proposal includes an anticipated $40.5 million of new revenue from table games. Lawmakers earlier this year approved a bill to allow the state’s three racinos to offer blackjack, poker, and roulette.
“We think that we’ll have one up and running by Memorial Day, with the rest to follow shortly thereafter,” Scola said. “So we expect tables games this summer in Delaware.”
The state is looking to expand sports betting at its racinos. Currently, Delaware can conduct parlay betting, which involves placing a wager on two or more teams. Officials are seeking to incorporate bets on single games, as is the case in Nevada.
It is waiting to hear if the Supreme Court will take up its appeal of an August 2009 decision by the U.S. Court of Appeals for the Third District in Philadelphia. That decision determined that wagering on single games in Delaware is illegal.