Despite upgrade, Louisiana sells GOs at wider spread

Despite a rating upgrade ahead of the deal, Louisiana paid a wider spread to a 10-year benchmark when it sold general obligation bonds Tuesday than it did a year ago.

In Tuesday’s pricing, the state paid a 15 basis point spread to the Triple-A benchmark evaluated by BVAL for the 2034 maturity, with 5% coupons. By comparison, it paid an eight bp spread to the same Triple-A index on April 13, 2023, on its 10-year GO maturity, also with a 5% coupon.

Both bond sales were sold competitively. 

Louisiana State Treasurer John Fleming, shown in 2014 when he was in Congress, presided over the state’s competitive GO bond sale this week.

Bloomberg News

Tuesday’s bond sale came after S&P Global Ratings raised the state’s and state GO rating to AA from AA-minus in late March.

Tuesday’s GO bonds were rated Aa2 by Moody’s Ratings and AA by Kroll Bond Rating Agency. Fitch Ratings assigns Louisiana its AA-minus long term issuer default rating, but did not issue a rating for Tuesday’s deal.

All the ratings have stable outlooks. 

Tuesday’s deal consisted of $293.82 million in new money Series 2024A serial bonds, with maturities from May 2025 to May 2044, and $97 million in refunding Series 2024B bonds with maturities in the Augusts of 2025, 2026, and 2027.

“We were very pleased with the results as there was very strong demand for both sales,” said Jeff Crouere, director of communications for Louisiana State Treasurer John Fleming.

A syndicate led by JPMorgan won the bid for the Series 2024A bonds, with the 5% coupon May 2025 maturity priced to yield 3.38% (+6 basis points to Bloomberg’s BVAL triple-A scale), 5s of 2029 at 2.76% (+13), 5s of 2034 at 2.79% (+15), 5s of 2039 at 3.28% (+14) and 4s of 2044 at 4.04% (+51). The bonds have a 10-year call.

By comparison, the $238.325 million Series 2023A deal saw 5s of 2024 at 2.31% (+1 BVAL), 5s of 2028 at 2.03% (+1), 5s of 2033 at 2.14% (+8), 5s of 2038 at 2.84% (+16) and 4s of 2043 at 3.64% (+76).

JPMorgan has had a rollercoaster ride in Louisiana.

In 2021 it was pulled from a $700 million deal because its firearm policies did not meet pro-gun litmus tests imposed by state leaders.

But in 2023, Louisiana retained JPMorgan for a grant anticipation revenue bond deal, citing limited options for underwriters experienced in handling Garvees.

It also switched its 2023 GO deal to competitive from negotiated amid a fight on the Louisiana Bond Commission over whether some banks should be excluded from the state underwriting pool for insufficiently pro-firearm policies.

Louisiana has no law or policy that bars a firm from bidding competitively on a bond transaction. JPMorgan won the auction for the 2023 GO deal.

The Series 2024B refunding bonds were sold to Jefferies, with 5s of 8/2025 at 3.28% and 5s of 2027 at 2.92%.

The Series 2024A proceeds will be used for capital improvement projects and the Series 2024B proceeds refund Series 2014C bonds maturing in 2025, 2026, and 2027. The refunding sale provided the state with $3.1 million in net present value savings or 3.15% of refunded bonds, the Office of the Louisiana Treasurer reported.

The deal landed at attractive rates for individuals in high tax brackets, Kim Olsan, senior vice president of municipal trading at FHN Financial, wrote in a report.

“Louisiana’s 5-year 2.76% yield offered a top-bracket buyer a (taxable equivalent yield) of 4.67% and for those in the 37% bracket the TEY equaled 4.38% — both at or above the 10-year UST yield,” she wrote.

When asked to compare the results of the new money 10-year maturity to that of the April 2023 bond, Crouere said, “In the last year, rates have increased, which is not unusual, since markets are always moving, impacting any year-to-year comparison.”

Public Resources Advisory Group was municipal advisor on the deal. Braezeale, Sachse & Wilson and Auzenne & Associates were co-bond counsel.

As of the end of June 30, 2023, Louisiana had $8.033 billion of net tax supported debt, of which $3.489 billion was GO debt, according to Moody’s Ratings. It had an additional $827 million in insurance assessment debt.

In a report issued earlier this month, Moody’s cited the state government’s strengthened reserves because of strong revenue collection, conservative budgeting and constitutional requirements to build fund balances.

It also pointed to positive financial management practices like consensus revenue forecasting and the executive power to make midyear budget adjustments. Finally, it cited an approach to pension funding that promotes amortization of unfunded liability.

As of June 30, 2023, the state ratio of net unrestricted cash as a percent of own-source revenue was 118% in comparison to the 50-state median at the end of fiscal 2022 of 73%, Moody’s reported.

For credit challenges, Moody’s cited a “modest” state-wide population decline and low relative income levels “that are a drag on economic growth and reduce resiliency to extreme weather events.”

Moody’s said the state was exposed to revenue volatility associated with financial and economic dependency on oil and natural gas extraction and refining.

The state has “elevated exposure to storm damage and sea level rise because of its location, and its state-sponsored insurance entities that, after a severe storm, could substantially increase statewide assessments,” Moody’s Vice President Denise Rappmund and Senior Vice President Nicholas Samuels said.

Moody’s assigned a “moderately negative” environmental social governance credit impact score. This was determined by a “highly negative” environmental score, “moderately negative” social score, and “neutral-to-low” governance score.

“Louisiana’s location … makes it among the most vulnerable states to some of the immediate consequence of climate change, including increasingly severe and more frequent storms and flooding,” the Moody’s analysts said. 

S&P’s upgrade brought its Louisiana rating to the same level as Kroll and Moody’s.

“The upgrades reflect our view of Louisiana’s demonstrated commitment to improving and maintaining reserves above levels that we consider very strong and the state’s ongoing effort to reduce unfunded pension liabilities through its strong pension funding discipline,” said S&P Associate Director Rob Marker.

“We view both Louisiana’s strong reserve balance and its long-term commitment to funding its pension liabilities as generally sustainable provided enhancements within the state’s constitution dedicating funds to reserve accounts and unfunded liabilities,” Marker said.

He said the AA rating stemmed from the state’s “active budget monitoring” and “ability and demonstrated willingness to modify expenditures” to maintain structural balance. It also comes from the state’s “very strong” reserves and “conservative” budgeting.  

He said the rating also reflects pension plan funding discipline “with plan contributions generally exceeding actuarially determined contribution amounts and a constitutional requirement to use a portion of surplus revenues to pay down unfunded pension liabilities.”

On the flip side, “The rating also reflects economic fundamentals that generally trail the U.S., including population declines, comparatively low-income levels, and gross state product growth that usually lags the U.S.,” Marker said.

For its part, KBRA said the key factor supporting its AA rating of the state was its “favorable financial operating performance, as evidenced by the generation of surpluses in each of past seven consecutive audited fiscal years, supporting what KBRA considers to be robust growth in both financial reserves and available liquidity.”

As offsetting factors KBRA Senior Directors Michael Taylor and Linda Vanderperre spoke of the state’s “comparatively weak socioeconomic metrics, modest exposure to commodity pricing volatility given employment and economic output concentration in chemical and petroleum production, and increasing vulnerability to climate events, including hurricanes and coastal erosion.

“Louisiana’s debt profile is considered moderate when compared to the national median, with net tax-supported debt obligations representing just $1,525 per capita, 2.81% of personal income, and 2.6% of gross state product,” the analysts wrote.

Reporter Jessica Lerner and Executive Editor Lynne Funk contributed to this story.

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