New Jersey Pays for Negative Outlook as Yield Widens on $669 Million Sale
New Jersey issued $669 million in general-obligation refunding bonds at a higher yield above top-rated debt than on a comparable sale in December, a week after Moody’s Investors Service lowered its rating outlook.
The increased yield difference also came after bank analyst Meredith Whitney ranked it among the worst state credits. The third most-indebted U.S. state yesterday sold $133 million of bonds maturing in 2020 priced to yield 2.94 percent, 0.3 percentage points above the Municipal Market Advisers AAA rated 10-year index. In December, its 10-year maturities yielded 0.01 percentage point below the 10-year index.
Fortune reported this week that Whitney, of Meredith Whitney Advisory Group LLC, ranked New Jersey along with Illinois and Ohio as having the second-worst financial position among U.S. states. The study cited unfunded pension obligations and limited tax-raising options as issues.
“My read is they had to come at a significant concession to the market, between their negative outlook and the pension fund black mark,” said Alan Schankel, managing director of Philadelphia-based Janney Montgomery Scott LLC, which didn’t participate in the sale. “I think New Jersey is paying the price in the market.”
The refinancing of $679 million in outstanding general obligations and a restructuring of payment schedules cuts debt- service costs by $282 million in the fiscal year that ends June 30, 2011, according to the Office of Public Finance.
The true interest cost for the bonds, which had an average maturity of 6.5 years, was 2.55 percent, according to the state Treasury Department.
‘Very Good Rate’
“It wasn’t the most favorable market we waded into,” James Petrino, director of the Office of Public Finance, said in an interview after the sale. “The bottom line is the rates are very low; we still captured a very good rate.”
The average AAA rated 10-year bond yielded 2.64 percent yesterday, down from 3.07 percent on June 30, according to Municipal Market Advisors.
New Jersey, with an Aa2 rating from Moody’s, had to discount its price, resulting in higher yields, on the longer- term bonds to sell them, Gary Gildersleeve of New York-based Evercore Wealth Management said after reviewing the deal’s pricing.
“It’s cheap relative to other states,” he said. “But Illinois and California could only hope to be there.”
States including New Jersey, California and Illinois are facing criticism for persistent budget deficits and underfunding for retirement plans and public-worker health benefits that exceed a combined $1 trillion, according to the Pew Center on the States.
Credit Default Swaps
New Jersey credit default swaps, the price to insure $10,000 worth of New Jersey bonds against non-payment, cost $210 yesterday, the fourth-highest among states, according to data compiled by Bloomberg. California and Illinois were most expensive, at $260, and Michigan was third at $237, according to the Bloomberg data.
New Jersey last sold comparable-maturity general obligations Dec. 8, priced to yield 2.98 percent, 0.01 percentage point less than the MMA 10-year index.
Tax-exempt bonds posted their best quarterly performance since September 2009, returning about 3.7 percent, according to the BofA Merrill Lynch Municipal Master Index, which tracks total return on tax-exempt bonds. The securities lost 0.06 percent for September, the weakest month since March.
Following are descriptions of pending sales of municipal debt in the U.S.:
NEW YORK STATE DORMITORY AUTHORITY, the largest issuer of municipal debt in 2009 after California, plans to sell about $1.15 billion in tax-exempts and taxable Build Americas as early as this week. The personal-income tax revenue bonds, which carry a top rating from Standard & Poor’s, will be used to fund projects for the State University of New York and City University of New York, in addition to grants for educational facilities. M.R. Beale & Company will lead the marketing. (Added Sept. 30)
CALIFORNIA DEPARTMENT OF WATER RESOURCES will sell $1.9 billion in tax-exempt revenue bonds as soon as next week in its biggest issue since May 6, when it sold $3 billion in comparable securities for refinancing. The notes, backed by revenue from consumer electricity bills, will refund debt sold to buy electricity for cash-strapped utilities during California’s power crisis a decade ago. A portion of the sale will also end interest-rate swaps agreements, according to a Sept. 24 Fitch Ratings report. The securities are rated Aa2 by Moody’s and AA by Fitch, both third-highest, one level above S&P’s AA- rating. Underwriters led by Bank of America Merrill Lynch will market the bonds. (Added Oct. 1)
NEW YORK CITY, the most-populous U.S. city, is borrowing $1.3 billion next week. The city will offer $800 million of taxable debt, including $650 million of Build America Bonds, earmarked for capital projects. The remaining $150 million in traditional taxables will be sold competitively on Oct. 7. New York also is offering $500 million in tax-exempt securities to refinance existing debt and convert $90 million in outstanding variable-rate demand notes to fixed-rate bonds. Bank of America Merrill Lynch will lead underwriters marketing the securities, which carry AA, the third-highest ranking from Fitch and S&P, and Aa3, one level lower by Moody’s. (Added Oct. 1)
METROPOLITAN PIER & EXHIBITION AUTHORITY, a municipal corporation created by the Illinois General Assembly that owns and manages Chicago’s McCormick Place convention facility and Navy Pier, plans to sell $940 million in tax-exempt revenue bonds as early as next week. The bonds, secured by the agency’s tax revenue, will refinance $900 million of existing debt and fund construction and renovation. (Added Oct. 1)
GEORGIA, which sold part of its loan fund to help balance its 2011 budget, plans to sell about $975 million in taxable and tax-exempt bonds through competitive sales on Oct. 5, to fund projects at more than a dozen state agencies and refinance $321 million of prior issues. The state, which has $8.3 billion in general obligations outstanding, carries top credit scores from the three major ratings companies. (Added Oct. 1)
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