Abercrombie touts sale of General Obligation Bonds, State’s credit rating

HONOLULU -– Gov. Neil Abercrombie and Budget and Finance Director Kalbert Young announced Thursday, December 1 that the State sold $1.28 billion of General Obligation Bonds.

A state’s General obligation Bond is a bond that is backed by the “full faith and credit” of the State. In other words, the State is pledging its full taxing powers to guarantee the prompt payment of the principal and interest on the GO bonds, as they become due.

For more information on General Obligation Bonds, click here

State officials touted the transaction, which occurred last week, as a victory for the State’s creditworthiness and financial planning.

Following the transaction, Moody’s Investors Service, Standard & Poor’s Ratings Service, and Fitch Ratings affirmed the State’s credit ratings of Aa2/AA/AA.

Taking advantage of the market’s lower interest rates, the General Obligation Bonds also refinanced $488 million in previously issued bonds for economic savings, State officials said. For the refinanced bonds alone, the cost was refinanced to 2.3 percent. The bonds are expected to reduce Hawaii’s annual debt service payments with significant economic savings from the refinancing—over $59 million of present value savings (or 9.65 percent of the refunded principal amount), according to the State administration. The total transaction had an interest cost of 3.34 percent.

Earlier this year, the State used money from the Hurricane Relief and Rainy Day Funds to assist in balancing the budget. The bond transaction now allows the State to recapitalize those reserves.

In completing the bond transaction, the State administration said it also sought to improve the State’s credit rating. 

“To achieve this objective, the State’s financial goal in the near term is to show positive results in rebuilding reserves, reducing unfunded liabilities ratios, and balancing future revenue drivers such as military contributions and federal program spending,” Young said. “Credit agency reports evaluating the State’s financial management positively highlighted the State’s planned efforts.”

The State said the transaction:

* Reduced debt service by saving $59 million on refunded outstanding debt.
* Keeps debt service for fiscal year 2012—2013 at a legislatively-appropriated level.
* Restructured current outstanding debt.
* Normalizes the State’s debt service profile.
* Builds debt capacity from 2014 to 2019.
* Improves the State’s financial position
* Garnered positive a credit rating review.
* Enables recapitalization of the Hurricane Relief and Rainy Day Funds.

“This is the largest bond issue in the history of the State of Hawaii to date,” Young said. “The merits and components of this transaction execute on our objective to get our financial house in order and at the same time we are rebuilding investor confidence.”

Young led a finance team to complete the transaction on a recent trip to New York City. The team included Department of Business, Economic Development, and Tourism Director Richard Lim; Budget and Finance administrator Scott Kami; State Economist Eugene Tian; and State Rep. Kyle Yamashita.

The $1.28 billion in bonds included $800 million in new debt, but was complemented with $488 million in refunding currently existing bonds at a lower interest rate.

Bond buyers benefit from purchasing Hawaii bonds because interest on the bonds is excluded from gross income for Federal income tax purposes and exempt from all taxation by the State, Abercrombie said.

The $800 million of new money proceeds from the bond sale will be used for various public improvement projects, including public buildings and facilities, elementary and secondary schools, community college and university facilities, libraries and parks. 

“The response by these investors is welcomed news to Hawaii,” said Sherry Menor-McNamara Chief Operating Officer of the Chamber of Commerce of Hawaii. “This transaction proves that our State government is doing business to stabilize its finances.”

Bank of America Merrill Lynch and Goldman Sachs and Co. served as the joint bookrunner managers for the bond sale, with Barclays Capital, Morgan Stanley, JP Morgan and Citi serving as co-managers. Firms with offices in Hawaii also participated in a retail selling group for the Bonds.

To see Standard & Poor’s rating report for Hawaii, click here