New Jersey to bring rare general obligation offering to market after Thanksgiving

This piece first published November 24, 2014, Debtwire Municipals
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Even with the State of New Jersey’s well-publicized problems, a USD 525m general obligation (GO) offering planned for after the holiday will see strong demand, said Mark J. Tenenhaus, director of municipal research at RSW Investments.

The offering includes USD 525m in general obligation bonds, maturing 2016 to 2035, in tranches ranging from USD 17.6m to USD 38.98m for later-dated paper. Most of the proceeds, roughly USD 450m, will fund capital project grants to increase capacity at higher education institutions while another USD 60.3m will go toward environmental protection. A small USD 14.7m will help revitalize the Port of New Jersey.

After what has been a tumultuous year for the Garden State’s finances, the rare general obligation bond will price on 3 December, according to buynjbonds.gov. The state has USD 2.1bn in general obligation debt outstanding, and USD 32.7bn in appropriation debt outstanding, according to the preliminary official statement.

Moody’s Investors Service rates New Jersey’s general obligation debt A1 with a negative outlook. Fitch Ratings and Standard & Poor’s assign an A to New Jersey’s general obligation debt. Fitch has the credit on negative outlook, S&P on stable outlook. The appropriation debt is one notch below the general obligation debt: A2 at Moody’s, and A- at Fitch and S&P.

The three ratings agencies all took a swipe at New Jersey’s ratings this year. And after FY14 revenue came in USD 807m below projections, Governor Chris Christie reduced the state’s planned pension contribution of USD 1.5bn in FY14 to USD 696m. He also announced plans to do the same in FY15 by paying only USD 681m of the planned contribution of USD 2.25bn. Planned contributions are already beneath the actuarially required contribution of USD 5.5bn, as previously reported.

Trading in tandem

There’s a solid 50bps spread between the state’s general obligation and appropriation debt on the 10-year MMD scale, said Alan Schankel, managing director at Janney Capital Markets. New Jersey’s general obligation debt is trading at 48bps over the AAA MMD, and 10bps wider since the summer, which is consistent with the downgrades and negative views on the state, Schankel said. Appropriation debt is trading 98bps over AAA MMD, he said.

“New Jersey isn’t in danger of defaulting, but it is possible there is further erosion, causing the spreads to widen further. They’re more likely to widen than narrow, so investors should be cautious about whether they’re getting compensated for risk,” Schankel said.

For most A-rated, 10-year bonds, the spread over AAA municipal bonds is 38bps, according to data compiled by Debtwire Municipals. The market perceives the state’s appropriation debt as subordinate to general obligation debt in the event of a default, said one trader.

“The spread between the two shouldn’t be as wide. The general obligation is mispriced,” said the trader.

Whetting market appetite

The state expects USD 32.9bn in revenue for FY15, which began 1 July, but announced Friday major revenue sources are 5.6% ahead YoY and in line with the FY15 growth rate of 5.2%.

There is little general obligation debt outstanding, so it should be well received by the market, said Tenenhaus. Unfortunately, there is no real upside in New Jersey because there is no good news on the horizon that might improve the state’s fiscal problems, Tenenhaus said.

But that downside – possibility for future downgrades and pricing deterioration – is what makes markets, Tenenhaus said. Every investor has different reasons and variables to determine attractive pricing, he said. Because New Jersey is a high tax state, there’s built-in demand for in-state paper, which remains very strong.

 

 

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