Pennsylvania (STOPA1:US) plans to sell $950 million in general-obligation debt tomorrow, its largest tax- exempt bond offering in more than five years, with relative borrowing costs for issuers in the state near a six-month high.
The issue will cover expenses tied to three state prisons, a judicial center in Philadelphia, environmental remediation, and fixing bridges, Eric Shirk, a spokesman for Governor Tom Corbett, said last week by e-mail. “Continued lower interest rates” provided an impetus for tomorrow’s sale, Shirk said.
While rates in the $3.7 trillion municipal market remain near the lowest in four decades, the extra yield on an index of Pennsylvania issuers relative to top-rated general-obligation bonds has widened. The spread rose to 0.49 percentage point last week, matching the most since Oct. 7, according to data compiled by Bloomberg.
“It’s a fairly well-run state and their finances are in decent condition,” said Laura LaRosa, who helps manage about $4 billion of municipal debt at Glenmede Investment & Wealth Management in Philadelphia. “We still like Pennsylvania a lot. We’ll be looking at it.”
The sixth-most-populous state sold almost $826 million in tax-exempt general-obligation bonds in October. At the time, the spread on the Pennsylvania index relative to top-rated debt was 0.36 percentage point, data compiled by Bloomberg show. It was Pennsylvania’s first such offering in 2011. The City Council in the capital of Harrisburg made a rejected attempt to put the city in bankruptcy that month.
“The last few times Pennsylvania has come to market it has been expensive,” LaRosa said last week by telephone. Bond yields rise when prices fall.
The difference in yield for the Pennsylvania index compared with top-rated debt on April 13 was 45 basis points, or 8 basis points less than the average of the past two years, the data show. A basis point is 0.01 percentage point.
Moody’s Investors Service rated the bonds Aa1, its second- highest grade, noting the state’s limited debt and its economy’s “demonstrated resilience post-recession.” Pennsylvania’s fiscal 2012 budget is more balanced than in 2011, Moody’s said.
Moody’s and Fitch Ratings have negative outlooks for the credit, based on rising liabilities for pensions and other retiree benefits. They also cite the risk of revenue shortfalls.
The state Industrial Development Authority also is marketing about $175 million in debt in coming days while the Pennsylvania Turnpike Commission sold $218.5 million last week, said John Donaldson, director of fixed income at Radnor, Pennsylvania-based Haverford Trust Co.
“It would seem to be as much as the market can absorb in a 10-day period,” Donaldson said by telephone. “For Pennsylvania, that’s a lot of big deals in a short time.”
The state sold about $950.7 million of general-obligation bonds in December 2006, according to the website for the governor’s budget office.
Pennsylvania probably will offer about $800 million of bonds in December to fund projects, Shirk said.
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