New Jersey has retired almost $500 million of outstanding debt for about $160 million in savings, joining other issuers in using defeasance as a cost-saving tool and to improve their credit.
Gov. Phil Murphy touted the state’s debt defeasement during an address last week at a meeting of the Municipal Analysts Group of New York.
“Today’s announcement marks a significant step in our administration’s commitment to strengthen our state’s finances,” Murphy told MAGNY on Thursday.
Since the New Jersey’s debt reduction funds creation, the state has defeased a total of $3.686 billion of bond principal, which officials say has saved $1.358 billion of interest expense.
“This latest successful round of defeasance is a testament to the talented and hard-working staff in our Office of Public Finance,” state Treasurer Elizabeth Maher Muoio said in a statement. ”The substantial savings generated continues to further the Governor’s goal of providing for a stronger, fairer and more affordable state.”
A defeasance is used to retire outstanding bonds without a redemption or using an open market tender. Cash is used to buy U.S. Treasury bonds or agency securities whose principal and interest are enough to meet the payments due on the outstanding bonds.
Between Oct. 19 and Jan. 10, the Treasury’s Office of Public Finance (OPF), the state’s financial advisor, bond counsel and the Attorney General’s Office conducted six separate purchases of U.S. Treasury bonds using $500 million available in the defeasance fund.
In all, $484 million of state Economic Development Authority School Facilities construction bonds, state general obligation bonds and state Building Authority bonds were defeased.
The state said that bonds which were defeased had a total debt service cost of $660 million, including principal and interest, over the remaining life of the bonds, with the net savings to the state of $160 million.
OPF then bought Treasuries with money from the debt defeasance fund for the selected bonds. The Treasuries were put into irrevocable escrow accounts at a trustee bank and at each bond’s call date, part of Treasuries plus interest earned will pay off the bond in full.
All bonds defeased through the process were removed from the state’s balance sheet at the time the Treasury securities were placed into escrow.
The decisions to pay down debt, as opposed to
Florida has been one of the leading states in this area. Since 2019, the state has
The efforts are not lost on broker-dealers. In October, Mesirow said its public finance and institutional sales and trading groups would
The team, led by Jay Connelly, managing director of institutional sales and trading in Chicago and Sam Gruer, managing director of public finance in New York, said they have seen an increase.
“We’re starting to see more defeasances outside of the traditional advance refundings, whether taxable or tax-exempt,” Gruer told The Bond Buyer Tuesday. “There are a number of reasons why issuers are doing that.
Gruer said there are different motivations for different clients.
“It seems to me that in certain jurisdictions there’s an effort to reduce the debt load in what’s being described as a way to protect future generations,” Gruer said. “Maybe that is true and maybe it is not — I don’t have an opinion on that. But what we are see seeing is debt paydowns — whether it’s avoiding the issuance of bonds by paying cash for projects or taking surplus funds and using that to pay down debt.”
That’s what the
Gruer said the firm is also seeing more cash defeasance that is “”economically driven,” noting that there are ways issuers can defease lower interest bearing bonds, or “buying down debt,” that can sometimes improve the appearance of the issuer’s balance sheet and generate present value savings.
In New Jersey’s case, the goal is to improve the state’s long-term fiscal health as it reduces outstanding debt.
There is no centralized database for actual defeasances and paydowns so quantifying the amount is difficult.
Connelly said Mesirow saw a definite pickup in business going into the end of the year.
“There was a flurry of activity that definitely came, so as a new player in the market we were happy to see the flow,” Connelly said.