(Bloomberg) — Florida bond investors are about to have an unusual decision to make — whether to sell their debt back to the state that issued the securities in the first place.
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The state is offering its first ever buyback, or what’s known as a tender, to current holders. Essentially, state officials want to reduce their debt load, so they are offering to purchase the bonds at a premium. Usually this type of transaction is funded through a new bond sale as a refinancing tactic. But Florida is just offering cash after lawmakers set aside $500 million to pay down debt in the 2024 legislative session.
“Very seldom do issuers have excess cash available,” said Ben Watkins, the state’s director of bond finance, in an interview. The premium is not public, but it is “very generous.”
Florida has been actively reducing the amount of outstanding obligations after Governor Ron DeSantis took office in 2019. The governor touted that he’s paid down more than one-third of the state’s entire tax-supported debt over his term in a June budget release.
“The state maintains a AAA credit rating, one of the lowest tax burdens in America, and more than $17 billion in reserve,” DeSantis said at the time.
The tender comes as Florida assesses the damages from back-to-back hurricanes. It’s possible there may be a need for more borrowing, but that’s not imminent as it takes time to model losses and insurance claims are paid out over a five-year period, according to Watkins. “We are well positioned to deal with it,” he said.
This year, Florida’s revenue collections are running roughly $1.1 billion above expectations, according to the state’s August revenue estimating conference. That’s primarily driven by levies on corporate income and investment earnings. The state is expecting to buy back about $500 million of its $15.3 billion of outstanding debt, Watkins said.
A traditional bond tender is essentially a refinancing, allowing a municipality to swap out expensive debt for new bonds with a lower interest rate. Issuers offer to purchase bonds at a specific price on a certain date, usually above the current market value but still low enough that the government can realize savings.
It’s been a popular tactic in recent years after federal tax-law changes eliminated a common type of refunding.
The offerings are “much more accepted” among new borrowings these days, said Jeff Scruggs, head of the public sector and infrastructure group at Goldman Sachs Group Inc. “The effort is on the sales and trading side trying to get investors to tender their bonds.”
States, cities and other issuers offered to repurchase about $30 billion in muni bonds last year, and are on track for a similar amount in 2024, according to an assessment from Barclays Plc. The bank estimated less than half that sum was successfully tendered.
For the Florida transaction, investors have until Oct. 23 to decide whether to sell back their bonds. The state is offering to tender about $165 million of turnpike enterprise debt, $90 million of so-called right of way bonds for a state transportation program, and $245 million of public education bonds.
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