Treasurer Lemoine Reports Extraordinary 2010 Bond Sale Results
May 26, 2010
Augusta, Maine – Maine raised $58,200,000 in the bond market this week at remarkably low borrowing costs, reported State Treasurer David Lemoine. “We had an extraordinary market response to our bonds. Our good name, the limited supply of Maine bonds, insurance industry interest and an international flight to quality combined to drive our costs of borrowing way down,” he said.
The composite True Interest Cost (TIC) for this bond deal is just 2.2085%.
Maine’s 2010 bond sale included taxable, tax-exempt and new Build America (BAB) taxable bonds, all of which will be repaid over the next ten years. Maine traditionally retires its bonds on a very rapid 10-year schedule.
The State’s first-time use of BABs for several maturities (2017 – 2020) is expected to provide annual savings of $87,000 and gross lifetime savings of $754,000 (net present value savings of $644,000) compared to traditional tax-exempt financing.
The Treasurer also front-loaded repayment of the traditional taxable bonds, allowing the State to pay off these more expensive debts early in the ten-year amortization schedule. This structure should provide the State with approximately $93,839 in annual savings and gross lifetime savings of $1.13 million (net present value savings of $973,579) compared to a traditionally blended taxable and tax-exempt amortization schedule.
The market strength on Maine’s credit showed up in several ways. We were able to sell the 2011 maturity of the Taxable Bonds at an interest rate of 0.85%, only 14 basis points more than U.S. Treasuries. The 2011 maturity of the Tax-Exempt Bonds was sold at an interest rate of 0.38%, which is only 8 basis points more than 1-yr AAA MMD (the pricing benchmark for tax-exempt bonds). One hundred basis points equal one per cent.
“These spreads are impressively tight,” noted Treasurer Lemoine, “although I continue to believe that Maine should be rated as a true triple-A credit for fixed income investment purposes.” Also in the market was a $42 billion auction of two-year U.S. Treasury notes which sold at a record-low yield of 0.769%.
The project expenses covered by this bond sale included highway repairs ($25m), Maine Community College building renovations ($2.1m), University of Maine building renovations ($5m), waste water construction ($3m), Land for Maine’s Future purchases ($4.75), working waterfront preservation ($2m) and a variety of other improvements.
Maine General Obligation bonds are issued only once each year and are repaid within 10 years. The proceeds are used to repay bond anticipation notes that accumulate during the fiscal year as agencies draw down their authorized funds. Bond anticipation notes are issued quarterly throughout the year so that the State borrows no more than it needs, no sooner than it is needed.
Maine’s relatively low debt burden is seen as credit strength by Moody’s, S&P and NAIC, each of which rated Maine’s credit earlier this month in anticipation of this bond sale. Maine’s total tax supported debt service, assuming that all pending bond proposals are authorized by voters on June 8th and November 2nd this year, is expected to obligate 5.28% of general fund and highway fund revenues in FY 11, 5.55% in FY12 and 5.04% in FY 13.
For more information on the proposed S&P State Ratings Methodology, see: http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245211884743