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Florida Sells $247.7 Million of Lottery-Backed Debt: Muni Credit

Florida sold $247.7 million of bonds backed by the state lottery at yields cheaper than comparable revenue debt as it works to stem a decline in sales.

Pricing of the deal’s largest portion, $30.7 million maturing in 2022, produced a 3.15 percent yield, or 41 basis points below a 10-year index of A rated general-purpose revenue bonds, according to data compiled by Bloomberg. The longest maturity, $14.2 million due in 2023, yielded 3.4 percent, 60 basis points below a 12-year index of A rated revenue bonds.

The debt carries Standard & Poor’s top AAA rating and Moody’s Investors Service’s fifth-highest of A1. The disparity, which sometimes makes Florida lottery bonds difficult to price, didn’t deter investors in yesterday’s sale, said Justin Land, who manages $3 billion of municipal assets, including Florida lottery bonds, at Naples-based Wasmer Schroeder & Co.

“The deal did pretty well,” Land said in a telephone interview. “Not only have interest rates dropped, but the spreads have tightened as well, so they seem to be getting a pretty good rate.”

Florida’s Board of Education, which finances school construction, sold the lottery bonds and will use the proceeds to refund existing issues. The deal produced $24.5 million of net present-value savings over the life of the bonds, said Ben Watkins, director of the state’s Bond Finance Division.

Hurt by Recession

The recession has hurt revenue at the Florida lottery, the third-largest in the U.S. by sales. The lottery’s contribution to the state education trust fund after payments to winners and operating costs will decrease by 5 percent in fiscal 2011, which ends June 30, according to a Moody’s report. It will drop again the following year by 0.8 percent before rising 1.7 percent in fiscal 2013, Moody’s said.

The state is looking to enhance instant lottery games and scratch-off tickets to help boost sales, said Watkins.

“They’re constantly keeping those fresh and introducing new games in order to keep people interested in playing,” Watkins said in a telephone interview from Tallahassee.

Ron Schwartz, who manages the $880 million RidgeWorth Investment Grade Tax-Exempt Bond Fund in Orlando, also cited the narrower spread for Florida lottery bonds at the sale. Wells Fargo & Co. was the winning bidder on the competitive deal.

“They usually, in the past, have traded at a larger spread off the triple-A,” Schwartz said in a telephone interview.

A Florida lottery revenue bond rated A1 that sold in 2008 and matures in July 2023 traded Aug. 24, the most recent transaction, with an average yield of 3.35 percent, or 59 basis points below a 12-year index of A rated general-purpose revenue debt at the time.

Highest Yield

The trade that produced the highest yield so far this year occurred on Jan. 19, with an average yield of 5.36 percent, or 57 basis points above that day’s index.

Yields on top-rated 10-year tax-exempt debt rose to 2.23 percent yesterday, following a 2.17 percent 2011 low on Aug. 23. The year-to-date average is 2.88 percent. Yields on top-rated 30-year tax-exempt bonds hovered at 3.86 percent yesterday, after a year-low of 3.82 percent on Aug. 23. The 2011 average is 4.53 percent.

Following is a description of a pending sale of municipal debt:

NEW YORK STATE THRUWAY AUTHORITY, which oversees a 570-mile toll road system, will sell as soon as next week $350 million of personal-income tax revenue bonds to finance highway and bridge projects. The bonds are rated AAA, Standard & Poor’s highest grade. Siebert Brandford Shank & Co. LLC will lead banks on the deal. (Added Sept. 1)

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