Massachusetts Borrows at AAA Rates in $358 Million Build America Bond Sale

Massachusetts sold $358 million in Build America Bonds at rates rivaling those obtained by the higher-rated Ohio Water Development Authority last week, as yields on the taxable debt held close to a three-month low.

Massachusetts issued the bonds yesterday in a 21-year maturity yielding 4.50 percent, or 80 basis points above 30-year Treasuries, according to data compiled by Bloomberg. The state is rated second-highest by Moody’s Investors Service at Aa1, and third-highest by Standard & Poor’s at AA. A basis point is 0.01 percentage point.

The top-rated Ohio authority sold about $429 million in Build Americas, which included a 24-year maturity yielding 4.88 percent, or 95 basis points above a benchmark Treasury. The Kansas Transportation Authority, rated AAA by S&P and one step lower by Moody’s, on Aug. 17 issued about $325 million in Build Americas that included a 25-year issue at 4.60 percent, or 83 basis points above Treasuries.

“It’s trading really tight to AAA spreads -- that’s a function of how well it’s viewed in the market,” said Peter Delahunt, managing director of trading risk in the municipal bond department at Raymond James & Associates Inc. in New York. “Massachusetts always trades very strong. It’s a good credit and there is not a lot of long-duration product out there for taxable-portfolio managers.”

Build Americas yield about 5.75 percent on average, according to the Wells Fargo Build America Bond index. The yield touched 5.70 on Aug. 16, the lowest since it reached 5.66 percent on May 25. The index has an average maturity of 28.83 years and an average credit rating of Aa3 and AA- from Moody’s and S&P, respectively.

‘Important Tool’

Citigroup Inc. won a competitive bid to market the Bay State’s securities, which will be used to pay for capital- improvement projects.

“Although the Build America Bond program is relatively new, it’s become an incredibly important tool for issuers,” Massachusetts Treasurer Tim Cahill said in an e-mail. “This program allows us to borrow very efficiently in the larger, more liquid taxable market. The end winner is taxpayers, who get the benefit of public infrastructure financed at the lowest possible rates.”

The U.S. government subsidizes 35 percent of the interest cost of Build America securities, which were authorized under the economic stimulus legislation passed by Congress and signed by President Barack Obama last year. Issuers have sold about $128 billion of the debt.

Federal Aid

Legislators in Massachusetts authorized a $27.9 billion budget for fiscal 2011 on June 25 using $374 million of spending cuts and at least $100 million from the state’s rainy-day fund. The state has the second-most net tax-supported debt per person, according to Moody’s, behind Connecticut.

The commonwealth will receive more than $600 million as part of the $26 billion state-aid plan signed into law by Obama Aug. 11, Moody’s said in an Aug. 18 report. The federal package included $16 billion to help cover Medicaid bills and $10 billion for teachers.

Massachusetts revenue is forecast to rise this year by 3.3 percent, according to Moody’s, helped in part by last year’s sales tax increase to 6.25 percent from 5 percent and the elimination of an exemption for alcoholic beverages. The state has a corporate income tax of 9.5 percent, the fifth-highest in the U.S., according to Bloomberg data.

In the tax-exempt market, yields on 10-year AAA bonds reached a record-low 2.66 percent yesterday, according to Municipal Market Advisors, an independent research firm based in Concord, Massachusetts. MMA’s index began in January 2001.

Wisconsin, rated third-highest, at AA, by S&P, sold about $147 million in tax-exempt debt yesterday with 2019 maturities yielding 2.25 percent. The state also sold about $310 million in Build Americas, including 22-year maturities at yields of 5.00 percent, or a spread of 130 basis points.

Following are descriptions of pending sales of municipal debt in the U.S.:

MIAMI-DADE COUNTY, Florida’s largest, plans to issue $217.3 million in debt, including $203.9 million in Build Americas, as early as next week. The county, rated third-highest by S&P, at AA, and fourth-highest by Moody’s, at Aa3, will use the majority of the issue to fund transportation projects. Loop Capital Markets LLC will lead a group marketing the bonds. (Added Aug. 19)

PENNSYLVANIA TURNPIKE COMMISSION, set up in 1937 to help manage the state’s highways, plans to issue about $600 million in tax-exempt debt and taxable Build Americas as early as next week. The revenue bonds, rated fourth-highest by Moody’s at Aa3, will be used for capital-improvement projects. The notes will be marketed by a group led by Bank of America Merrill Lynch. (Updated Aug. 19)

To contact the reporter on this story: Justin Doom in New York at jdoom@bloomberg.net; Esmé E. Deprez in New York at edeprez@bloomberg.net

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