SAN FRANCISCO — Count Washington Treasurer James McIntire as satisfied with his inaugural venture into Build America Bonds, as well as the state’s first negotiated bond sale since 1997.
The state priced $500 million of taxable general obligation BABs Thursday, a day after selling $564 million competitively in three separate auctions.
“We set this up so we had a competitive sale Wednesday, and you can clearly see the advantage of the Build America Bonds over the traditional tax-exempt market, which we’re just thrilled with,” McIntire said in a phone interview.
Washington’s direct-pay BABs will receive a 35% subsidy from the U.S. Treasury. The longest maturity, 2039, yielded 5.481%, meaning the state will pay an effective 3.56% after the subsidy.
In those cases where it is possible to compare the same maturities from Wednesday’s competitive tax-exempt pricings and Thursday’s negotiated BAB deal, the state appears to enjoy substantial savings after the BAB subsidies are counted.
In the 2024 maturity, for example, the BABs yielded 4.736%, or an effective rate of 3.07% after the federal subsidy — between 72 and 77 basis points lower than the same maturities in Wednesday’s tax-exempt sale.
Part of the difference comes down to call provisions. Washington’s BABs came without the traditional muni 10-year par call, going with a make-whole par call at Treasury plus 20 basis points, according to the Washington treasurer’s office.
Goldman, Sachs & Co., and JPMorgan ran the books on the BAB deal, Washington’s first negotiated sale since 1997.
Former Treasurer Mike Murphy, who retired before McIntire’s 2008 election, had a “no negotiated sales” policy.
McIntire said his office used negotiation for the taxable sale because there was no track record of a Build America Bond deal as big as Washington’s going competitively.
Washington’s BABs are double-barreled bonds, backed by the state’s motor vehicle fuel tax, as well as its general obligation pledge.
That GO pledge brings underlying ratings of AA from Fitch Ratings, AA-plus from Standard & Poor’s, and Aa1 from Moody’s Investors Service.
In last week’s competitive deals, Washington sold $230 million of new-money GO bonds to Merrill Lynch & Co., $213.9 million of refunding GOs, also won by Merrill, and $120 million of motor-vehicle fuel tax refunding GOs, won by Barclays Capital.
Because of last week’s backup in rates, the refunding transactions were downsized by almost half before Wednesday’s auction, from $644 million to $333 million for the two deals.
Distinctions in Washington law will affect how the state uses the BAB program, according to McIntire.
For general-purpose GOs, gross debt service payments count toward the state’s debt limit, regardless of the federal subsidy, so they are not a good candidate for BABs.
The motor-vehicle fuel tax bonds are exempt from that limit.
“With that exemption, we’ll probably use BABs for as much of our motor-vehicle fuel tax [debt] as we can,” McIntire said. “Conceivably, we can do another billion of those before the BAB authorization expires [after 2010].”
McIntire said he likes the BAB program as it works now — an alternative to tax-exempt issuance.
“We’d be thrilled to see it extended,” he said.
But he said he’s leery about ideas like using tax credits to replace federal tax-exemption on municipal bond interest, which the Congressional Budget Office floated in August.
“A straightforward tax-exemption for all municipal debt is a clear-cut bright line that’s pretty hard to squeeze,” he said.
Tax-credit levels, on the other hand, could be adjusted by Congress, and as a former state lawmaker, McIntire said he knows how that is likely to turn out.
“If you have something that’s dialable, it’s likely to get dialed,” he said.
