TAX NEWS - June 2010

Massachusetts Tax: Massachusetts Sells tax-exempt bonds

Massachusetts, whose reserve dwindled by more than half last year, plans to sell $250 million in fixed-rate, tax-exempt bonds with yields at an eight-week high.

The state's 10-year general obligation yield rose to 3.48 percent on June 15, the highest since April 20, according to Bloomberg Fair Market Value data. The yield difference over top- rated obligations widened 4 basis points to 27 basis points in the period, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

Massachusetts drained its reserve from $2.1 billion to $841 million in the year that ended in June 2009 as the U.S. recession sapped revenue, according to Moody's Investors Service. Moody's and Fitch Ratings both grade the state's debt second-highest, at Aa1 and AA+, respectively.

"Significant use of reserves to close fiscal 2009 budget gap has reduced financial flexibility, although a sizeable reserve still remains," Moody's said in a report June 16.

The week's fourth-largest tax-exempt deal comes the month after Congress stripped a provision from legislation that would have extended about $24 billion of Medicaid payments beyond Dec. 31. Massachusetts, which incorporated the anticipated federal aid in its budget for the fiscal year beginning July 1, now faces a $687 million deficit, according to state Senator Steven A. Panagiotakos, a Democrat from Lowell.


'Taking Pause'

"Investors may be taking pause, trying to wait this out and get more clarification on how it's going to affect individual states," said Richard Ciccarone, chief research officer of Oak Brook, Illinois-based McDonnell Investment Management, which oversees $7 billion of municipal debt.

Average yields on tax-exempt, 10-year debt have jumped 7 basis points in the past week, according to Municipal Market Advisors. Yesterday, top-rated debt fell for the first time in a week, slipping 1 basis point to 3.19 percent.

In Massachusetts's most recent issue of tax-exempt general obligations, in May 2009, debt maturing in 2019 was priced to yield 3.08 percent, with investors paying more than 116 cents on the dollar. The yield was 2 basis points below similar-maturity AAA general obligations, according to Bloomberg Fair Market Value Data.

Those securities traded June 15 at an average yield of 3.14 percent, 19 basis points above top-rated debt of similar maturity, according to the benchmark.

More than half of the $2.4 billion in debt the commonwealth sold in 2009 was bought by individual investors even amid volatile market conditions, said Colin McNaught, the state's assistant treasurer for debt management. Top-rated 10-year debt started 2009 yielding about 3.91 percent and touched 2.95 percent in October, the lowest since at least 1996, according to MMA data.

This week's sale is the last issue for Massachusetts this fiscal year, McNaught said. The state plans $1.625 billion in debt sales during the 2011 fiscal year.


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

PUERTO RICO HIGHWAY AUTHORITY, which oversees 4,635 miles of roads, plans to reoffer $297.9 million in tax-exempt revenue refunding bonds as soon as next week. The floating-rate securities were originally issued in 1998, maturing in 2026, and in 2003, maturing in 2035. The new, fixed-rate bonds are backed by gasoline taxes, a portion of vehicle licensing fees and toll revenue. Jefferies & Co. is leading the group underwriting the deal.

GUAM POWER AUTHORITY, which serves 47,000 customers in the westernmost U.S. territory, plans to sell $146.5 million in revenue bonds as soon as next week. The debt is rated BBB, the second-lowest investment grade, by S&P and will be split into tax-exempts and taxable Build America Bonds. The deal is led by Morgan Stanley and may also include $55.3 million of a subordinate lien tranche rated BBB-, the lowest investment grade, according to S&P. Proceeds of the sale will go to refunding debt, so-called smart-grid technology and projects such as a new administrative building.

ALAMOGORDO, the New Mexico city nearest to the site of the first nuclear tests in the U.S., plans to issue $89 million in debt as soon as next week. The deal is split into $73.1 million of tax-exempts that mature from 2022 through 2026, in 2030, 2035 and 2040 and $16.3 million of taxable securities that mature serially from 2011 through 2022. Marketing will be led by Morgan Keegan Inc. and proceeds will go to refunding improvement bonds for the Gerald Champion Regional Medical Center. The securities are rated BBB+, third-lowest, by S&P.

PUERTO RICO SALES TAX FINANCING CORP., created in 2006 to help the island commonwealth lower borrowing costs, plans to offer $1.4 billion in tax-exempt revenue bonds as soon as next week. The bonds, rated the fifth-highest level at A1 by Moody's and A+ by S&P, will be marketed by a group led by Citigroup Inc. The securities are backed by 1.5 percentage points of the state's 5.5 percent sales tax and will refund debt from 2007, 2008 and 2009.