Politically driven cancellation of Maine deal may cost the state next time

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Maine Gov. Paul LePage's intervention to block the closing of two already priced general obligation bond sales may hurt the state when it returns to the market.

State Treasurer Terry Hayes informed Wells Fargo Securities and Citigroup, the winning bidders in the two June 12 competitive GO bond auctions, that the deals were canceled after LePage refused to authorize the securities.

Wells Fargo won the bid for $97.4 million of Series 2018B tax-exempt GOs and Citi was low bidder for $15.5 million of Series 2018A taxable GOs.

“I’m concerned that this is going to increase our borrowing costs,” said Hayes of the potential ramifications from the cancelled sale. “It brings a higher level of risk.”

LePage spokesman Peter Steele said the governor asked for more time to review the bond offering because of concerns about “eleventh-hour legislative spending.”

Maine GOs are voter-authorized, with the most recent such bond election in November.

“If the sale is cancelled, I believe the action will be reflected in future transactions, potentially resulting in higher borrowing costs,” said Janney Capital Markets municipal analyst Alan Schankel. “Maine will continue to have market access, but underwriters will be more cautious when bidding Maine debt in the future. “

The bonds were issued primarily to fund transportation infrastructure, but also contained funds for environmental, drinking water, housing and research and development projects. Maine GO bonds are rated Aa2 by Moody's Investors Service and AA by S&P Global Ratings.

Hayes said she gave LePage 24 hours more to review the deal but had no choice but to inform Citi and Wells Fargo of the cancellation after he missed a Thursday afternoon deadline that was needed to close the bond sale on Tuesday. She said LePage took no issue with the bond transaction in recent meetings and his only reason for blocking was legislative spending.

Hayes is running for governor as an independent candidate this year. Term limits mean LePage cannot seek another term.

Howard Cure, director of municipal bond research at Evercore Wealth Management, said many public finance professionals take for granted how a number of legislative, executive and administrative approvals are required for a successful bond sale and closing. He said since LePage will be out office soon, the cancellation likely won’t result in any long-term consequences to the state.

“It is unfortunate if the governor, who is term-limited at this point, is holding up a bond sale that already priced, in order to gain leverage in legislative negotiations," said Cure. “I think Governor LePage has been a usual governor in many respects and I wouldn’t expect his successor to operate in a similar manner.”

Hayes and LePage also clashed a year ago over the bond counsel for a planned $100 million transportation bond sale in June before reaching an accord just before the deadline. The Republican governor has repeatedly sparred with lawmakers over borrowing in recent years and held up past bond sales — though not after they were priced — due to disputes over funding for timber harvesting on state-owned land and the state’s rainy day fund.

Municipal Market Analytics partner Matt Fabian said a governor not allowing a previously priced bond transaction to proceed just for closing is “not typical” and that the circumstances behind the cancellation may impact Maine’s future borrowing capabilities.

“If it’s just a mistake, then mistakes happen and there wouldn’t likely be any credit harm,” said Fabian. “But if it’s concerted effort to hurt the deal then bonds will have to come cheaper to make it up to investors.”

Wells Fargo declined to comment on the bond cancellation. Citi did not immediately respond to a request for comment.