The Maryland Stadium Authority is coming to market with a $413.4 million issuance of tax- exempt revenue bonds that will finance construction and renovations to Maryland schools.
“We expect good demand from in-state retail and separately-managed account buyers, but we also expect interest from national investors,” said Patrick Luby, senior municipal bonds strategist at CreditSights.
“The prior bonds are widely held, so the new bonds would be an add-on credit for numerous potential investors.”
CreditSights
The Built to Learn revenue bonds, designated as Serial Bonds 2026-2044 and Term Bonds 2049 & 2054, are subject to a 10-year par call with pricing set for Tuesday and delivery scheduled for Oct. 30.
BofA Securities is senior manager on the deal with Raymond James, RBC Capital Markets, and Siebert Williams Shank & Co working as co-managers.
The Built to Learn program was created in 2020 and authorizes the MSA to issue up to $2.2 billion in debt for the construction of public school facilities throughout the state.
The bonds will be supported by an annual deposit made by the state using revenue flowing into a financing fund which is subject to appropriation. The financing fund is fed by the proceeds of video lottery terminals and table games from six casino spread across the state via an Exchange Trade Fund.
According to the Authority’s roadshow, the financing fund account held $60 million in 2023, which increased to $125 million in 2024 and will further increase to $127 million in 2025.
$100 million of the $127 million will be available to pay debt service on any bond under the act and $27 million will be deposited into the Prince George’s Public Private Partnership fund.
The bulk of the funds will go to five counties and the City of Baltimore. The city, Baltimore County and Montgomery County, each are scheduled to receive 21% of the funds.
The bonds will be secured by deposits into the Supplemental Public School Construction Financing Fund and “shall not constitute a debt of the state, any county, the city or governing board of the schools.”
The authority is responsible for contracting, managing, and overseeing the school facilities construction and improvements that are financed with the bond proceeds, but it may also authorize a county board of education to run the job depending on its track record.
Because Prince George’s County entered a P3, it does not receive any allocation of bond proceeds.
According to CreditSights, the authority most recently issued parity bonds in October 2021, which were A1/AA/A+ (ICE composite AA3) at the time of pricing.
Through the end of September, the year-to-date supply of bonds from Maryland issuers is already 64% more than 2023’s full-year total volume of $4.0 billion. Net supply was a negative $1.6 billion 2023, negative $1.7 billion in 2022, but totals $687 million for year to date. Last month’s net supply totaled $558 million.
Moody’s rates the issuance at Aa2 with a negative outlook.
Per Moody’s “Maryland’s constitution requires that gaming revenue be used solely for education purposes, including debt service of the Built to Learn bond program. Offsetting these strengths is the economically sensitive, narrow pledged revenue, which is provided subject to annual appropriation of funds for debt service.”
“Gaming constitutes a narrow base because of its discretionary nature, and it also entails elevated social risk in view of vulnerabilities that emerged during the pandemic.”
Moody’s upgraded the bonds Sept. 30 in conjunction with a methodology update. Getting into the positive with Moody’s would require enacting legal provisions that would limit allocation of available gaming revenue to other obligations or tightening limits on leverage of available revenue.
Showing a proven track record of growth in pledged revenue, or additions of other sources, that mitigate risks implicit in the narrow base provided by casino receipts could also change the opinion.
Standard & Poors rated the issuance as AA with a stable outlook.
“The stable outlook reflects the outlook on the State of Maryland, which reflects our opinion of the state’s ability to proactively manage economic and budgetary risks that arise, and maintain structural balance,” said S&P Global Ratings credit analyst Joe Pezzimenti.
S&P would consider a downgrade “if we believe additional debt issuances created further credit risk by increasing annual debt service requirements to near or exceeding the amount of available funds that can be transferred into the financing fund each year.”
Video lottery terminals are like traditional slot machines but operate under a different regulatory framework. According to Verified Market Reports, “the video lottery terminals market is poised for substantial growth in the coming years, driven by several key strategies and factors.”
According to the American Gaming Association, in July, U.S. commercial gaming revenue grew 3.1% compared to the same month in 2023, the industry’s 41st consecutive month of annual growth.
“Through the first seven months of 2024, commercial gaming revenue has surpassed last year’s record-setting pace by 7.2%, totaling $41.23 billion. Commercial gaming revenue reached $60.4 billion in 2022, passing the previous record of $53 billion set in 2021.”
According to the Tax Policy Center state and local governments collected roughly $35 billion from various forms of gambling on 2021, accounting for about 1% of state and local revenues.
TPC also cites there may be hard limits on how much a state or municipality can expect to make by betting on gambling as a revenue source.
Per TPC, “One limit on gambling revenue is that an abundance of gambling options can cannibalize a state’s collections. If a state builds a new casino, it will most likely draw gamblers who were already using existing casinos rather than add new gamblers to the pool.
“Over the past decade, inflation-adjusted gambling revenue only increased 6%, and it declined 3% when measured per adults ages 18 and older.”
States tapping gambling as revenue boosters hit the jackpot in 2018 when the Supreme Court legalized sports betting in all states. Since then, 38 states and the District of Colombia has waded into the betting pool with Maryland bringing in $64 million in gambling tax revenue.