Maryland’s Largest County Borrows $325 Million as Outlook Rises

Montgomery County, Maryland’s most- populous and one of about 60 top-rated counties in the U.S., will borrow $325 million after being removed from a watchlist for potential credit downgrade by Moody’s Investors Service.

The suburb of Washington, D.C., home to the National Institutes of Health and other federal offices, was put on review for a possible rating cut after the recession reduced tax revenue, forcing it to tap reserves, Moody’s said April 5. The county’s main account, the general fund, shrank by more than half to $108 million in June 2009 from a year earlier, according to data compiled by Bloomberg. Moody’s took the county off review and affirmed its rating of Aaa last night, according to John Cline, Moody’s spokesman.

The potential downgrade hadn’t stopped Montgomery County’s general-obligation debt from trading at a lower yield than Maryland’s AAA rated obligations, Bloomberg data show. The county’s tax-exempt bonds due in 2020 were priced to yield 3.15 percent, 17 basis points below a comparable state bond. The spread fell to 4 basis points today, according to Bloomberg data. A basis point is 0.01 percentage point.

Montgomery County is “going to do very well” in pricing tomorrow, said Anthony Shields, a principal in the public-finance department at Williams Capital Group in New York. “It’s a great credit, it’s a high-grade, and there’s a big appetite for tax-exempts.”

Fitch Ratings also assigned the county’s bonds its highest ranking, citing a “formidable economic base” in a July 2 report. Montgomery County, with a 2009 population of about 972,000, is one of 63 counties with a top rating, according to Fitch. The U.S. Census recognizes 3,141 counties in the nation.

‘Best News’

“We got the best news imaginable today,” Jennifer Barrett, the county’s director of finance, said of Moody’s decision. The county used “increases in energy and cell-phone taxes, along with extensive expenditure reductions and employee furloughs” to address Moody’s earlier credit concerns, Barrett said.

In addition to $195 million in tax-exempts maturing serially from 2011 through 2022, the county will offer about $106 million in traditional municipals, taxable Build America Bonds or a combination of the two, based on underwriter bids, Barrett said.

Another $24 million will be sold as taxable Recovery Zone Economic Development bonds, which offer issuers a 45 percent federal subsidy, preliminary offering documents show.

“The $106 million looks BAB-ish,” Shields said of the tranche, which matures serially from 2023 to 2030. “Short-term is going to be retail-oriented, tax-exempt, and the longer stuff will be BABs.”

Prior Maryland Sale

Maryland last sold Build America Bonds in February before the U.S. Treasury trimmed a federal subsidy payment by about $7,000 for money the state owed on other programs. So-called offset risk and the uncertain future of the Build America program, which is awaiting extension by Congress, weren’t factors in Montgomery County’s willingness to issue subsidized debt, Barrett said.

Build America Bonds, created last year as part of the economic stimulus program, are the fastest-growing part of the $2.8 trillion municipal market. Issuers are eligible for a 35 percent subsidy on interest costs from the U.S. Treasury. About $118 billion of the securities have been sold, Bloomberg data show.

BABs Extension

The program is set to expire in December. A two-year extension is included in a Senate bill awaiting action. Passed by the House of Representatives May 28, the provision would cut federal subsidies to 32 percent in 2011 and 30 percent in 2012.

“We were mindful of the issues, but the savings are very attractive,” Barrett said.

Montgomery County sold taxable Build Americas in November, with securities maturing in 20 years priced to yield 5.45 percent, 117 basis points above a Treasury due in 2030, according to Bloomberg data.

The same obligations traded on April 7 for an average yield of 5.42 percent, 73 basis points above the benchmark.

Yields on 10-year, top-rated debt fell 4 basis points today to 2.95 percent, the lowest since Oct. 5, according to Concord, Massachusetts-based Municipal Market Advisors. The 11 consecutive days of decline is the longest such streak since July 2008, MMA data show.

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