Cuomo Hurdles Voters in $1 Billion Sale: Muni Credit
(Corrects to show sales-tax bonds count against the debt cap in sixth paragraph. For more credit-market news, click on TOP CM. For Municipal Credit Markets column alerts, see SALT MUNCREDIT.)
Governor Andrew Cuomo plans to sell $1 billion in bonds backed by sales taxes for the first time in 18 years as New York debt outpaces the $3.7 trillion municipal bond market by the most in two months.
The securities will be issued next month under a program included in the budget that lawmakers approved in March as New York’s sales-tax revenue set a record high. It’s designed to win the same top rating as New York debt backed by personal income taxes and save money as the state consolidates borrowing for road and bridge construction, said Morris Peters, a spokesman for Cuomo’s budget division.
The bonds, which won’t require voter approval, will provide a new credit in a market hungering for New York borrowings, said Howard Cure, director of muni research at Evercore Wealth Management LLC, which oversees about $4.7 billion. Issuers in the state have sold 34 percent less debt in 2013 than at the same time last year, on pace for the steepest slowdown in at least a decade, data compiled by Bloomberg show.
“With New York state, anytime there’s a new structure for debt, it’s an opportunity to diversify your portfolio, and it should be very well received,” said Cure, who’s based in Manhattan. “It’s another example of New York being creative in devising mechanisms to circumvent voter approval,” which is needed for general-obligation debt.
Cuomo, a 55-year-old Democrat, has instilled confidence in investors, winning three consecutive on-time budgets for the first time since 1984 and trimming more than $13 billion in deficits. The victories have New York poised for its highest credit rating from Standard & Poor’s since 1972.
Comptroller Thomas DiNapoli, a fellow Democrat, doesn’t support Cuomo’s plan. He said it will build on New York’s decades-old practice of borrowing without voter approval, he wrote in an April report on the fiscal 2014 budget. Only about 5 percent of the state’s outstanding debt has been authorized by referendum, DiNapoli said. The tax bonds count against the debt cap, he said.
“The new debt structure provides an additional vehicle that will allow the state to avoid seeking voter-approval for billions of dollars in new borrowing in the years ahead,” DiNapoli said in the report.
The program won’t increase the amount of debt New York issues and it won’t go toward closing budget gaps, as some programs in the past have, Peters said. Even though voters won’t have their say, the borrowing still must be approved by the legislature, the Public Authorities Control Board and the governing board of the agency that’s issuing the bonds, he said.
As issuance has slowed this year, New York’s debt has been beating the rest of the market. Investors demand about 18 basis points, or 0.18 percentage point, of extra yield to own New York bonds instead of benchmark offerings, close to the smallest spread since July, Bloomberg data show.
The $1 billion issue, scheduled to start Oct. 16, is part of a plan to save as New York consolidates borrowing for road and bridge construction into three programs -- personal income tax, general obligation and sales tax, Peters said. S&P rates the PIT debt AAA and the general obligations AA, third-highest. The sales-tax bonds haven’t been rated.
“New York PIT bonds have yields that are at least 20 basis points better than some of our older programs,” Peters said by e-mail. “We expect our new sales-tax bonds to perform just as well.”
It would be the state’s first issue of sales-tax-backed debt since the New York Local Government Assistance Corp. in 1995, according to Peters. Ten-year debt the agency sold in March that year priced to yield 5.45 percent, compared with about 5.3 percent for benchmark debt, Bloomberg data show.
This month, a state agency sold PIT securities, including 10-year bonds priced to yield 3.06 percent, or about 0.1 percentage point above benchmark debt.
Some institutional investors are approaching their capacity for the income-tax debt, JPMorgan Securities LLC wrote in response to a proposal request by the Thruway Authority, which issues personal income tax-backed debt.
“All mutual funds, the largest holders of PIT bonds, have a single credit capacity constraint,” JPMorgan wrote in its September 2012 request to become an underwriter for the Thruway. “To improve the pricing of PIT bonds and market receptivity of New York state bonds, the state could diversify its offering.”
The sales-tax bonds will be structured similarly to the PIT debt, according to New York’s capital-spending plan. One percent of state sales-tax revenue will be set aside each year to pay them off and if collections aren’t enough, the fund will automatically pull from savings, it said.
Last fiscal year, New York collected $11.2 billion in sales taxes, beating the $10.6 billion collected in fiscal 2008 as the U.S. plunged into the worst recession since the Great Depression, according to Peters.
Fred Yosca, head of fixed-income trading at BNY Mellon Capital Markets LLC in New York, said the sales-tax bonds will help portfolio managers diversify and will probably get the credit rating the state wants.
“But at the end of the day, it’s state debt and there’s no getting around that,” Yosca said.
Localities nationwide plan to issue about $3.6 billion of long-term debt this week as yields are the lowest in three months. At 2.69 percent, benchmark 10-year yields compare with 2.62 percent on Treasuries with a similar maturity.
The ratio of the interest rates, a measure of relative value, is about 103 percent, compared with a 10-year average of about 95 percent. The lower the figure, the more expensive munis are compared with federal securities.
Following are pending sales:
Washington’s Tobacco Settlement Authority is set to issue about $344 million of revenue bonds this week, Bloomberg data show.
Connecticut plans to sell $575 million in general-obligation debt to finance a general-fund deficit that arose as the state changed procedures to conform with generally accepted accounting principles.
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