October 22, 2009

State holds off refinancing $600 million in bonds

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By Len Lazarick
len@marylandreporter.com

The state sold $200 million in bonds at the lowest interest rates in 20 years Wednesday, but it pulled back on the refinancing of another $600 million in older bonds since that was not going to reap the huge savings expected.

The Board of Public Works gave State Treasurer Nancy Kopp the authority to go back to refinance the bonds at auction or a negotiated sale sometime in the future.

“Because of the change of market rates in the last few days, we decided that the benefit to the taxpayer of the refunding wasn’t sufficient,” Kopp told MarylandReporter.com’s Andy Rosen.

The overall “true interest cost” of the $200 million was 2.93 percent, beating the a 20-year low of 3.06 percent set in August 2008.

At the beginning of the month, the state thought it could save as much as $33 million by refinancing about $600 million in older bonds issued at higher rates, said Patricia Konrad, director of debt management in the treasurer’s office. But over the last few weeks, municipal market rates went up and those on U.S. Treasury notes went down.

Those two moving pieces are what made the sale less lucrative. When the state refinances bonds, it sells new bonds and puts the money into special Treasury notes for state and local governments called Slugs. The interest and principal on those notes is used to pay off the bonds as they become due.

By Monday, it looked like the state could only save $12 million by refinancing $365 million in older bonds. By Wednesday morning, those savings had evaporated, not meeting state standards.

Initially, state and municipal bond rates were “really low,” Konrad said, and states rushed to float bonds, flooding the market and causing interest rates to rise. She noted that Pennsylvania had pulled a $900 million bond issue it had planned, and other states had halted bond issues as well.

“We’re going to be following the market” to see when it would be a good time to refinance, Konrad said.

Also check The Daily Record for another account of the bond sale by Danielle Ulman.