SAN FRANCISCO — Washington will sell nearly $800 million of mostly refunding bonds next week as low rates continue to drive large refinancing deals.
Treasurer James McIntire said the state will continue to sift through its portfolio to take advantage of the record low rates.
"As an economist, I don't see another low-interest rate environment like this anywhere on the next 30-year horizon," McIntire said in an interview. "Obviously for a treasurer it is a mixed bag. This kind of low interest-rate environment means we don't get to earn enough on our Treasury and we have to compensate for that in some fashion."
The state has a policy of not refunding unless it achieves at least a 5% net present-value savings. McIntire said the state has seen around 8% to 10% savings from some of its recent refundings. It attained $396 million in present-value savings by refunding $3.5 billion in 11 deals since June 2009, the treasurer's office said.
Next week's sale is scheduled to price as a competitive deal on Tuesday split into three series: $338 million of general obligation refunding bonds, $364 million of motor-vehicle tax refunding GOs, and $85 million of certificates of participation.
The treasurer's office has remained mum on the expected savings, only saying it expects to achieve its minimum net 5% present-value savings.
"We are now reaping the rewards of the call provisions on a lot of those bonds that we sold earlier," McIntire said.
Since 2009, the municipal market has seen more than $370 billion of refundings nationwide out of $3.7 trillion of total debt outstanding as of the end of March, according to Thomson Reuters.
Low interest rates are good news for issuers but not so much for investors.
"Generally speaking, the refinancings kind of put the market in the environment of constantly looking for replacement bonds because there are bonds being called away or durations in portfolios being shortened," said Michael Pietronico, CEO at Miller Tabak Asset Management. "So investors that are looking to maintain a certain level of income from a portfolio find it a challenging environment."
Washington has taken advantage of the environment as its shorter-term spreads have tightened over the last several years.
The state, rated double-A-plus across the board, has seen its five-year bond spreads narrow 10 basis points since June 2009 against the MMD triple-A index, which itself has tightened 67% or 136 basis points over the same period. Washington's 10-year paper narrowed by 7 basis points, its 20-year by 6 basis points and its 30-year widened by a basis point, according to Thomson Reuters data.
Spreads tightened even as both Moody's and Fitch in January revised their outlook on the state's GOs to negative from stable due to pressure from weak revenues due to a slow recovery from the recession. McIntire said the outlooks came out after several quarters of downward revisions to state revenue forecasts, noting that revenues have since stabilized. "In some respects it is somewhat of a backward looking outlook, if you will," he said.
He said since the state doesn't have an income tax to spur in-state investors, it sees many of its bonds held by institutional investors and so it has worked hard to keep investors informed about its finances.
On Monday, Moody's released a report affirming its rating on the state that noted the state's sound fiscal management and willingness to address budget shortfalls. Fitch also held to its rating in a report released Tuesday.
"These strengths are tempered by exposure to the cyclical aerospace industry, above average debt ratios, and an economy that proved more vulnerable to the housing downturn than expected," Moody's said.
Standard & Poor's, which has kept its stable outlook on Washington GOs, also held to its line in a report released on Monday.
"We view the state's financial management as strong, demonstrated by its continued willingness to make timely and proactive budget amendments as it deems necessary to maintain budgetary balance," Standard & Poor's credit analyst Gabriel Petek said in a statement.
However, the report noted the state's GO and appropriation-backed debt is "moderately high" at $2,776 per capita, 6.3% of total personal income and 5.3% of the state's gross state product.