State refinances debt with bonds at lower interest

May 20, 1993|By John W. Frece | John W. Frece,Staff Writer

State officials jumped on the debt refinancing bandwago yesterday, selling $148 million in general obligation bonds at the lowest rate in 15 years.

Proceeds from the new bonds, which pay 5.1 percent, would be used to redeem a like amount of higher-interest bonds when the older bonds become callable five years from now.

Treasurer Lucille Maurer, who developed the "advance refunding" program as a member of the Board of Public Works, estimated the state would save $5 million to $6 million over the life of the new bonds by substituting the lower-interest bonds.

The transaction was part of an overall $278 million offering of 15-year bonds that was by far the largest bond sale the state has ever conducted.

It attracted four bids, the lowest of which was from a syndicate headed by Goldman Sachs that included a number of Maryland firms: Legg Mason Wood Walker Inc., Alex. Brown & Sons Inc., Ferris, Baker Watts Inc., Maryland National Bank and First National Bank of Maryland.

The winning bid of 5.1 percent was the lowest interest rate the state has paid on bonds since March 1978.

Maryland remains one of only four states to enjoy a triple-A rating, the best available, from all three major New York bond-rating houses -- Moody's Investors Service, Standard & Poor's Corp., and Fitch Investors Service.

"We don't get much good news," Gov. William Donald Schaefer said yesterday. "But we've managed to maintain our triple-A after coming through the most difficult financial times the state has ever been through."

Proceeds from $130 million of the sale will be used to pay for dozens of state construction projects, including public schools, local jails, and a variety of cultural, educational and health facilities.

The remaining $148 million will be put into an escrow fund to be used to redeem bonds sold in 1988 or thereafter, but which cannot be "called" by the state until their 10th year of maturity. Most of those bonds pay interest in the 6 percent to 7 percent range.

By funding the redemptions in advance, the state can take advantage of low interest rates now, while bondholders can hope that interest rates in five years will be up enough to cancel or minimize any loss from the early redemption.

Comptroller Louis L. Goldstein, who called the 5.1 percent bid "a splendid rate," noted that rates have been inching up in recent days, fueled in part by recent reports indicating inflation has begun to heat up.

State officials said it was always difficult to time the twice- or thrice-yearly bond sales to coincide with dips in the market because the sales often were scheduled two months or more in advance.

"We picked the right time," said Frederick W. Puddester, deputy secretary of budget and fiscal planning. "We could have gone in earlier and we wouldn't have gotten the same savings."

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