New York State has moved a step closer to selling its first variable-rate debt offering thanks to a unanimous vote by the state Assembly to approve a new borrowing authority.
This bonding power would allow the state to sell debt at lower rates. The bill now moves to the state Senate.
The Assembly passed the bill Thursday, almost a year after both houses of the Legislature gave municipalities the power to sell variable-rate debt. As a result, a number of local issuers have tapped the variable-rate market, with New York City leading the way. And the city is eyeing even larger variable-rate bond sales.
"What we're doing is providing the state with the same financing tool as we did the localities last year," said Charles Carrier, a spokesman for the Assembly. "The concept is to help the state take advantage of lower interest rates available on variable-rate debt, therefore helping out the tax-payer."
The measure passed last week is expected to face little if any opposition from the state Senate, said Senate spokesman William Stevens. "With the low interest rates, we think it's a good idea," Mr. Stevens said.
Support for granting the state variable-rate borrowing authority received a a boost from state Comptroller Edward V. Regan, who has for the past year asked the Legislature to allow his office, as the state's issuing agent, to sell floating-rate debt.
At the moment, variable-rate debt is more than 300 basis points cheaper to issue than comparable fixed-rate securities, despite the interest-rate risk involved.
"The flexibility given by the authorization to issue variable-rate bonds would benefit the state by providing a mechanism to borrow on a long-term basis while paying lower short-term interest rates," states a memorandum issued by the comptroller's office.
To date, only agencies on the state level, such as the Metropolitan Transportation Authority and the Job Development Authority, have issued variable-rate securities. These securities are repriced or remarketed every seven days, and their yields reflect a spread calculated by a common interest-rate barometer, such as Treasury securities.
Variable-rate debt also requires credit enhancement, such as a letter of credit from a bank with a strong rating. A spokeswoman for the state comptroller's office said the state has yet to receive LOCs for a possible bond deal. The letter provides liquidity for the remarketing and repricing of variable-rate debt.
Although variable-rate securities are at the moment cheaper than fixed-rate debt, there are risks involved.
Vladimir Y. Stadnyk, a managing director at Standard & Poor's Corp., said issuers must be aware that interest rates over a period of time could rise and substantially increase the issuers' borrowing costs. As a general rule, rating services become concerned when variable-rate debt accounts for more than 20% of a municipality's capital structure.
"The issuance of variable-rate debt could be innocuous, or it could be problematic," Mr. Stadnyk said. "The problem is, when too much of it is issued, [interest-rate costs] become subject to the vagaries of the market."
Standard & Poor's rates the state's general obligation bonds A-minus, with a negative outlook. Fitch Investors Service rates New York State GOs A-plus, while Moody's Investors Service rates the securities A.