Investors will snap up the more than $2 billion of New York State personal income tax revenue bonds entering the market Tuesday despite the state’s near-term budget risks stemming from coronavirus-induced revenue losses, according to analysts.
The Empire State Development Corporation is scheduled to issue about $2.1 billion of PIT bonds on behalf of the state in a competitive deal to fund capital projects, with $1.6 billion of tax-exempt bonds and $458 million of federally taxable securities.
PRAG is financial advisor on the sale. Nixon Peabody and Hardwick Law Firm are operating as co-bond counsel.
The deal is rated AA-plus with a negative outlook by both S&P Global Ratings and Fitch Ratings. S&P revised New York’s credit outlook to negative from stable ahead of the sale Friday, citing uncertainty about the state's budget-balancing ability while facing revenue losses caused by the ongoing COVID-19 pandemic.
The transaction is pricing at an opportune time, according to Greg Saulnier, municipal analyst at Refinitiv MMD, with investors seeking high-yield paper in a low-yield environment. Spread tightening for lower-rated investment-grade credits, such as the recently sold New York Transportation Development Corp.’s John F. Kennedy International Airport Project special facility revenue refunding bonds, reflects the likely demand for Tuesday’s deal, he said.
“What we have seen over the past week or two is that participants, in a search for greater yield, are targeting some of the issuers and sectors that were beat up by the pandemic,” Saulnier said.
New York PIT bonds with 20-year maturities were trading at around 30 basis points above the MMD triple-A scale prior to the COVID-19 outbreak in March, he noted, and widened to as much as 90 to 100 bps over during the height of pandemic, before tightening more recently to around the plus 45 to 50 range.
On Monday just before the sale, a $5 million block of New York Urban Development Corp. PIT bonds with a 5% coupons maturing in 2044 traded at yields of 1.80% and 1.79%.
Howard Cure, director of municipal bond research at Evercore Wealth Management, also said the New York PITs should attract investor interest because of overall demand for municipal bonds during the last full week of trading in the calendar year. The tax-exempt portion of the deal, he said, could also spark orders from wealthy New York investors who have been hampered with a $10,000 cap on deductions for state and local taxes the past three years.
“Even if there is a slight increase in yield on a specialty state, I think the deal will be received very well,” Cure said. “I think it will get aggressive bids since there is demand for paper now.”
While he expects spread tightening, yields likely won’t reach pre-pandemic levels due to the state’s looming budget challenges and political uncertainty about receiving federal aid in a new congressional stimulus package.
The New York State Division of Budget is projecting a budget gap of $9.7 billion for the 2022 fiscal year that commences April 1 and $9.7 billion for 2023, according to a preliminary offering statement. The state has reduced prior budget forecasts' expected personal income tax collections by nearly $8 billion in the current 2021 fiscal year and $11 billion yearly through 2024.
New York State completed two PIT
