Washington note deal hits a glitch

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Washington expected to hit the the market Tuesday with a $68 million note sale propelled by the headwinds of affirmed ratings and stable outlooks, but ended up postponing the $54 million tax exempt portion until Thursday at 8:15 a.m., PDT, following a technical glitch.

The glitch resulted in some of the bidders being aware of a couponing restriction that the state's financing team had put on the deal, while others weren't.

"We caught it and decided to postpone the sale and reject the bids in order to have a level playing field," said Jason Richter, deputy treasurer of debt management for the state. "One-third of the bidders followed the instruction, but two-thirds didn't."

Richter said the state did well on the $14 million in taxable notes it sold, which were not affected by the glitch.

The state also plans to sell $653 million in general obligation bonds competitively next Tuesday.

"I am confident we will see a strong showing," Richter said. "We are seeing spreads on the state's bonds come back to where they were pre-COVID, based on what we are seeing on the Municipal Market Monitor's triple-A scale, and interest rates remain historically low."

The three largest rating agencies affirmed the state’s ratings ahead of the sales, and affirmed the stable outlook. The state secured AA-plus, Aaa and AA-plus GO ratings from Fitch Ratings, Moody’s Investors Service and S&P Global Ratings, respectively.

“Our ability to maintain such outstanding credit ratings goes to show that even in an economic downturn the state’s commitment to maintaining a robust rainy day fund scores highly with the rating agencies,” state Treasurer Duane Davidson said in a statement.

Washington State Treasurer Duane Davidson cited the state's robust reserves for intact ratings headed into the bond auctions.

The GOs will be auctioned in three series to pay for and reimburse the cost of capital and transportation projects.

The financial advisors for all three series are Montague DeRose & Associates and Piper Sandler. Bond counsel is Foster Garvey PC.

In a June 30 credit report, Moody’s cited the $3.6 billion in reserves the state had accumulated by the end of 2019 as a positive. But raters also cautioned the state faces a significant revenue shortfall in 2021 due to the pandemic and resulting downturn. Moody’s also cautioned that a protracted structural budget imbalance or one-time budget solutions could lead to a rating downgrade.

“We really have to be careful of our next steps,” Davidson said. “Borrowing to repay lost revenue is a recipe for a credit rating downgrade. That would translate to costlier future financings and wasted taxpayer dollars.”

Washington experienced some of the earliest coronavirus cases in the U.S. and was among the first states to implement shelter in place and other restrictions in response to the outbreak, Moody’s analysts wrote.

“Although data is still limited, these restrictions have had a significant negative impact on the state’s economy,” Moody’s wrote. “Washington’s unemployment rate increased from 3.8% in February to 16.3% in April, giving it the 13th highest rate of the 50 states in April.”

In its June forecast, the State Economic and Revenue Forecast Council lowered its estimate of total revenues for fiscal 2021 by $4.5 billion in the current biennium and $4.4 billion in the next. Forecasted general fund revenue is now $46.129 billion for the current biennium and $49.935 billion for the 2021-23 biennium. Forecasted GF-S revenue is $53.457 billion for the 2023-25 biennium, according to the forecast.

Absent corrective action, the revenue shortfall could result in a depletion of the state’s reserves, Moody’s cautioned. The state legislature is expected to meet in a special session to amend the budget for the 2019-21 biennium; and Moody’s expects state leaders will address the shortfall with a “combination of spending cuts, measured drawdowns of reserves and federal assistance.”

“Heading into the COVID-19-pandemic-induced recession, Washington’s credit profile benefited from an economy that had been among the strongest performing in the nation, often translating into better-than-forecast revenue growth,” S&P wrote in its report ahead of the bond sales.

From that growth, the state was able to build up its financial reserves, which is a credit positive, S&P wrote. According to Fitch, Washington’s AA-plus rating also reflects the state’s very strong financial resilience supported by reserves — including its fund balance and budget stabilization account.

Developing these balances during times of growth is an important tool for weathering revenue fluctuations and responding to economic downturns, Davidson said. Having a well-funded rainy day fund will help the state maintain strong and stable ratings, which are critical for ensuring continued access to low interest rates on future bond issuances, according to the treasurer.

Washington’s strong tech sector may give the state an advantage in the economic recovery compared to other states, particularly those more dependent on hard hit sectors like tourism, Moody’s wrote.

The state’s dependence on Boeing represents a challenge, as it is the state’s largest private-sector employer, even though the state’s economy has diversified in recent years, Moody’s wrote. In June 2020, Boeing announced plans to reduce its workforce by 16,000 through a combination of buyouts and layoffs, and 9,800 of those employees work in the state.

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Sell side Bond ratings Coronavirus State of Washington Primary bond market