BRADENTON, Fla. - Louisiana was not penalized by the market after its third rating downgrade in a year, given the top bid it received for its general obligation bonds, the state's financial advisor said.
The state competitively sold $189 million of 20-year GOs on Wednesday.
Bank of America Merrill Lynch was the top bidder with a true interest cost of 3.44%. A total of nine bids were submitted.
The deal came to market a week after S&P Global Ratings lowered the state's GO rating to AA-minus from AA, while maintaining a negative outlook.
S&P said its action reflected Louisiana's persistently weak revenue collections stemming from prolonged contraction in the oil and gas industry coupled with weak personal and corporate income tax collections.
It was third downgrade in year amid fiscal pressures and a long history of structural budget imbalance.
"I think you should be pleased," advisor Renee Boicourt of Lamont Financial Services told the State Bond Commission, which met Wednesday to approve BOAML's bid. "You did not see an incremental cost in funds because of that latest change in the rating."
Louisiana's GOs were downgraded to Aa3 from Aa2 by Moody's Investors Service in February 2016 over fiscal concerns, while Fitch Ratings downgraded the state to AA-minus from AA in April 2016 for the same reason.
Moody's maintains a negative outlook, while Fitch's outlook is stable.
Boicourt said this week's bidding indicated that any penalty in rates had already been "baked in" following previous changes in the state's rating.
She also said that S&P's AA-minus brought all the state's GO ratings to the same level, while still keeping them in the double-A category.
Boicourt called the bid a good result, "given where the market is."
"So you're saying we actually beat the market trend," said State Treasurer Ron Henson. "We were able to withstand the negative impact of the recent downgrade in that it was somewhat anticipated by the market anyway."
The bonds priced to yield 1.03% in 2018 with a 5% coupon, 2.88% in 2027 with a 5% coupon, and 3.91% in 2037 with a 4% coupon.
Spreads for those maturities to the benchmark were 2 basis points, 58 basis points, and 93 basis points.
Proceeds from the deal will pay for various roads, buildings and higher education projects.
Henson said that the bond issue was the second deal brought by the state using all proceeds to pay for capital projects.
"Previously, a portion of the bond proceeds was used to pay interest during the first year after the bond sale," he said. "This had the effect of the state paying interest on top of interest for the next 20 years, a practice the state no longer follows."
Louisiana faces even more fiscal pressures as $1 billion of temporary taxes fall off the books at the end of fiscal 2018, a factor S&P cited in its negative outlook.
Gov. John Bel Edwards is expected to back a series of tax reform measures to alleviate some of the state's budgeting problems during the legislative session that starts April 10 and runs through June 8.
When S&P downgraded the state, its analyst, Nora Wittstruck, said the Legislature will have the opportunity to either renew the temporary tax measures or enact new revenue measures during the upcoming session.
"Precedent leads us to believe legislative action will be difficult to implement given uncertainty about replacing the revenue measures with long-term structural tax changes," Wittstruck said.
