State of Connecticut STO, 2016 Series A&B

State of Connecticut
$868,265,000
Special Tax Obligation Bonds, 2016 Series A
and Special Tax Obligation Refunding Bonds, 2016 Series B

This was the 11th transaction senior managed by SCS for the State of Connecticut and the largest issuance in the 30-year history of the Special Tax Obligation credit

On September 13, 2016, Siebert Cisneros Shank priced the State of Connecticut’s 2016 Series STO Transportation Infrastructure Bonds, the largest issuance in the 30-year history of the Special Tax Obligation credit. This was the 11th transaction senior managed by SCS for the State of Connecticut. The bonds will fund state transportation facilities projects and maintenance, pay debt service and refund prior bonds.

The Bonds received ratings of Aa3/AA/AA- by Moody’s, S&P, and Fitch, respectively. Due to Fitch’s new rating methodology, the Bonds were downgraded from AA to AA-, in line with the State’s GO credit rating.

In preparation for the offering, SCS assisted the State with the execution of an aggressive pre-marketing campaign that included print, online and e-mail advertisements. Our firm introduced the State to “active” online ads which allowed interested investors to input their name and email address directly into the ad to receive more information on the STO bond sale. This option also allowed the State to continue to build up its database of investor email addresses.

We also assisted the State in creating its rating agency and investor presentations and facilitated one-on-one investor calls with State representatives. Of the 7 investors which participated in one-on-one calls with the State, 3 ultimately placed orders for the transaction.

Our firm also developed a “What’s Best” model to determine the optimum sizing/par amounts for the refunding series to accommodate the State’s specific goals regarding the refunding savings.

Pricing

In the days leading up to pricing the market experienced a sell-off with MMD increasing by between 2 and 7 basis points (bps) the Thursday and Friday prior to pricing. There was a very cautious tone entering the first day of pricing the market in anticipation of the week’s $12.9 billion new issue calendar.

Despite a significantly weak market, the SCS-led syndicate generated orders amounting to 16% ($136.2 million) of the transaction during the retail order period, 81% of which were placed by Connecticut retail investors.

Coming into the morning of the institutional order period, there was a weaker tone in the market following the previous day’s MMD increase of 2 – 3 bps. Following feedback received from investors during the pre-marketing period, for the institutional order period SCS recommended widening spreads 1-6 bps in an effort to sell the balance of the unsold $834 million bonds.

While the transaction received over $1.7 billion in total orders, including $976 million of priority and $137 million of retail orders, many of the shorter maturities still had significant balances left at the end of the institutional order period. After significant consultation between the State and our underwriting desk, we recommended increasing spreads by between 1 and 3 bps in the 2020 – 2027 maturities (MMD reads had rates increasing by 2 – 4 bps) and eliminating the 2016 Series B Bonds in years 2020 and 2022 – 2026 in order to get the bonds sold without having to significantly increase spreads. Additionally, in order to maintain pricing levels, SCS agreed to underwrite $84 million of the remaining balances (9.7% of the total issuance) in years 2022 – 2026. At the end of the day, final spreads were actually as much as 5 bps tighter (+45 in 2036) than the spreads that we went out with at the beginning of the institutional order period.

The transaction achieved an attractive all-in TIC of 2.80% and the $68,265,000 2016 Series B refunding bonds generated over $9 million in PV savings (11.9% of refunded par) despite being downsized by nearly $100 million.