Build America Bonds, Part II: On May 5, 2010, the Debt Management department held its second sale of general obligation Build America Bonds (BABs). The $450 million in bonds were sold via competitive sale, the largest competitive bond sale in the Commonwealth's history. It was also the second largest competitive sale of BABs since the program started in April 2009. According to Bloomberg, approximately $98.5 billion in BABs have been sold nationally since April 2009.
The Commonwealth received eight separate bids for the bonds. The bonds were awarded to Morgan Stanley based on that firm's lowest average yield for the bonds (also know as True Interest Cost or TIC) net of the 35% subsidy the Commonwealth will receive from the U.S. Treasury for selling the bonds under the BABs program. The TIC for the bonds was a low 3.17%, the lowest borrowing cost for a Commonwealth fixed rate bond sale in state history. It is also the lowest TIC for a BABs sale of $200 million or more since the program began. The bonds sold in 2028 and 2029 were priced at a spread of 52 basis points (100 basis points equal 1%) above the 30-year Treasury yield on May 5 th. This is also the lowest spread to the 30-year Treasury for any BABs priced to-date.
As a result of selling the bonds as BABs instead of traditional, tax-exempt bonds, the Commonwealth has lowered its interest costs over the life of the bonds by an estimated $42 million on a present value basis.
SIFMA Index Bonds: On March 11, 2010, the Debt Management department refunded the Commonwealth's outstanding Series 2005 A Refunding Bonds (Variable Rate Demand Bonds) using SIFMA Index Bonds. This refunding will result in lower bank counterparty exposure for the Commonwealth, as well as lower interest costs over the next three years. At the weighted average spread of 25.3 basis points for the 2010 Series A bonds, the Commonwealth has saved 65 basis points on approximately $538 million in bonds versus the 3-year weighted average bid of 85 basis points for bank liquidity on Variable Rate Demand Bonds (plus 5 basis points for remarketing costs of Variable Rate Demand Bonds). This results in $7.45 million in cash flow savings over the life of the SIFMA Index Bonds.
Build America Bonds: On December 1, 2009, the Debt Management department sold the Commonwealth's inaugural Build America Bond (BABs) program transaction. Under the BABs program, which was authorized as part of the American Recovery and Reinvestment Act of 2009, issuers are permitted to sell taxable bonds and receive a reimbursement subsidy equal to 35% of the interest costs on the bonds.
After a comprehensive investor outreach program and extensive marketing of the bonds over a two-week period, the Commonwealth sold $956.45 million of federally taxable BABs, achieving the lowest fixed-rate financing in Commonwealth history. At a very low true interest cost of 3.57%, the BABs pricing produced gross dollar savings of approximately $247 million versus a traditional tax-exempt structure. On a present value basis, the savings were estimated at $172 million (or 18% of total par).
The $956.45 million General Obligation Bonds, Consolidated Loan of 2009, Series E (Federally Taxable - Build America Bonds - Direct Pay to Issuer) accomplished nearly all of the Commonwealth's long borrowing needs (20 to 30 year maturities) over the next three years. Subsequent sales of bonds are expected to be much shorter, and will include retail-only sales and competitive sales.
Revenue Anticipation Notes: On September 15, 2009, the Debt Management department sold $1.2 billion in Revenue Anticipation Notes (or "RANs") through three competitive sales. The proceeds generated by the note sales are to be used to enhance the state's cash flow position over the course of Fiscal 2010. Each of the series of notes (Series A, Series B and Series C) are scheduled to be repaid prior to June 30, 2010.
The sale of the notes was extremely successful due to the strong demand from investors for Commonwealth paper and the overall strength of the markets. The average borrowing costs for the $1.2 billion in notes was below 0.31%, well below the yields at which any prior Commonwealth bond or note had been sold. The lower borrowing cost on cash-flow borrowing will save the Commonwealth and its taxpayers millions of dollars. For more information on the sale, please go to the posted on September 15, 2009 on the Treasury's home page.
Previous Debt Management Accomplishments:
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Last Updated: 5/11/2010
Disclaimer: The information is provided for quick reference only and is not an exhaustive compilation of information for any particular bond issue. It does not purport to present full and fair disclosure with respect to Commonwealth of Massachusetts debt within the meaning of applicable securities laws.
Fiscal 2009: During the most difficult municipal bond market in decades, the Debt Management department executed four successful bond sales that included large participation by individual Massachusetts investors. Of the $2.4 billion in bonds sold during Fiscal 2009, approximately $1.2 billion was sold to individual investors, representing 50% of all of the bonds sold. As part of each of these borrowings, the Debt Management department enhanced the marketing of the Commonwealth's bonds to local, individual buyers using www.buymassachusettsbonds.com. Bonds were offered to individual investors only during special early order periods for bonds during each sale, which allowed Massachusetts investors a chance to buy bonds before institutional investors were allowed to participate.
The significant increase in demand for bonds - due to the historic increased participation of individual investors - helped drive down the Commonwealth's borrowing costs in each of its sales in Fiscal 2009, saving the state's general fund and taxpayers tens of millions of dollars in reduced borrowing costs. For example, the May 2009 borrowing resulted in the lowest average borrowing cost ever for a Commonwealth fixed-rate transaction. The all-in True Interest Cost (or "TIC") for the borrowing was 3.96%. As a comparison of that rate, a 30-year fixed rate mortgage on the same day of the May bond sale (5/20/2009) was a 4.91%, according to Bloomberg. The interest cost differential (savings) on a present value basis (today's dollars) between the rate that the Commonwealth borrowed at and the quoted mortgage rate is approximately $50 million.
In addition to the direct bond sales to individual investors, approximately 13% of the bonds sold during Fiscal 2009 were sold by competitive auction to institutional investors. This percentage is consistent with results for the entire market.
Fiscal 2008: The Debt Management department took advantage of the municipal market's flattened yield curve in 2007 by adjusting the way it typically sells bonds over the course of a fiscal year, successfully generating more than $30 million in revenue that went straight to the Commonwealth's bottom line. In August 2007, the Debt Management department decided to sell all of the bonds for Fiscal 2008 in a single long-term borrowing instead of in quarterly borrowings over the course of the fiscal year, which is a more typical pattern. The sale of Commonwealth bonds generated approximately $1.3 billion in bond proceeds; the bonds were sold at an average interest rate of 4.64% and were reinvested at a rate of 5%. As the Commonwealth financed its capital program through Fiscal 2008, proceeds were drawn down from guaranteed investment contracts. Meanwhile, the reinvestment generated more than $30 million in revenue for the state's General Fund.