Banks and Banking & Finance and State Government and Investing and Bonds and Government & Economic Development and Government

Bond banks in Indiana, other states boost sales

November 30, 2011

State municipal-bond banks in Indiana, Vermont, Maine and New Hampshire plan to issue about $190 million in debt this week, as smaller communities seek to take advantage of 10-year interest rates near a six-week low.

The Indiana Bond Bank plans to sell $29 million this week, with a Raymond James Financial Inc. unit leading the marketing of the negotiated deal. Standard & Poor's rates the debt AA, its third-highest grade, and has a stable outlook on the credit.

The Vermont Municipal Bond Bank sold about $70 million in debt Tuesday, according to data compiled by Bloomberg. The organization created in 1970 was the nation’s first of its sort, set up to help raise funds for cities and towns.

The bank in Vermont has issued almost $123 million in securities this year, up 25 percent from $98.4 million in 2010, all through negotiated sales, according to data compiled by Bloomberg. This week’s deal was led by Citigroup Inc. A similar organization in Maine also will bring more debt to the $2.9 trillion municipal market this year than last, the data show.

“We’re saving a chunk of money for municipalities,” Robert Giroux, the Vermont bank’s executive director, said from his headquarters in Winooski before the latest sale. “This year is just the most active we’ve ever been.”

Yields on top-rated 10-year municipal debt averaged 2.23 percent Tuesday, a Bloomberg Valuation index shows. The index fell to 2.2 percent Nov. 21, the lowest level since Oct. 4.

Bond banks, typically overseen by state officials and gubernatorial appointees, provide access to the municipal-securities market for communities that may lack the resources to conduct their own offering. The organizations in New Hampshire and Indiana sold more debt last year, at $221.2 million and $561 million, respectively, than they have in 2011, the data show.

Indiana's bond bank was created by the General Assembly in 1984 and operates as a self-supporting quasi-government entity. A seven-member board of directors governs the bond bank, which is statutorily led by the state treasurer, which is currently Richard Mourdock. The bond bank is based in Indianapolis.

“Bond banks give you a little more comfort to have a pool rather than individual small towns,” said Howard Cure, director of municipal credit research for Evercore Wealth Management LLC in New York, which manages $2.9 billion of municipal debt. “As an investor, you may be hesitant about a little town in Vermont because of the small size.”

Rural development loans will be paid off using about $43 million raised in the Vermont sale, Giroux said. The loans to cities and towns in the state were from the U.S. Department of Agriculture, he said. The move will cut present-value costs by about 5 percent, he said.

S&P rates the Vermont bank’s bonds AA, its third-highest grade, and has a stable outlook on the credit.

New Hampshire’s municipal-bond bank plans to raise almost $36 million through a competitive sale as soon as Wednesday, according to a preliminary offering document. That would bring it to about $129.7 million in debt issued this year, compared with $221.2 million in 2010, data compiled by Bloomberg show.

The Granite State bank usually seeks competitive bids for bond offerings, said Sheila St. Germain, its executive director. The debt is rated Aa3, fourth-highest, with a stable outlook by Moody’s Investors Service.

Maine’s bond bank plans a competitive offering this week, after decades of almost always using negotiated agreements, according to Bloomberg data. State Treasurer Bruce Poliquin took Robert Lenna, the bank’s executive director, to task this year for spending almost $6,000 on a trip with several bank officials to New York in 2010 to close an $80.2 million negotiated sale.

When the banks sell debt, some of the proceeds may be put into reserve funds to provide extra security for investors, Evercore’s Cure said. Such reserves and other provisions help “prop up” the credit of smaller entities that might otherwise be considered riskier, he said.

“As a small town, if something were to happen to a major industry, it could disproportionately hurt your finances,” Cure said. “A lot of the bond bank’s appeal also is the fact that these little issuers can’t rely on municipal-bond insurance very much anymore.”

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