Financially strong Florida is trying to buy back its bonds for the first time

(Bloomberg) — Bond investors in Florida face an unusual decision — 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 current holders its first buyback, or so-called tender. Essentially, state officials want to reduce their debt burden, so they are offering to buy the bonds at a premium. Typically, this type of transaction is financed by selling new bonds as a refinancing tactic. But Florida is only offering cash after lawmakers allocated $500 million to pay down debt in the 2024 legislative session.

“Very rarely do issuers have excess cash,” Ben Watkins, the state’s director of bond finance, said in an interview. The bonus is not public, but “very generous”.

Florida actively reduced outstanding liabilities after Gov. Ron DeSantis took office in 2019. The governor announced in a budget release in June that he had paid off more than a third of the state’s total tax-supported debt over the course of his term.

“The state has a AAA credit rating, one of the lowest tax burdens in America and more than $17 billion in reserves,” DeSantis said at the time.

The call comes as Florida assesses damage from back-to-back hurricanes. It’s possible more loans will be needed, but that’s not imminent because modeling losses takes time and insurance claims are paid out over a five-year period, according to Watkins. “We are well positioned to deal with it,” he said.

Florida’s revenue this year is about $1.1 billion above expectations, according to the state’s August revenue estimation conference. This is primarily due to taxes on corporate income and capital gains. The state expects to repurchase about $500 million of its $15.3 billion in outstanding debt, Watkins said.

A traditional bond tender is essentially a refinancing that allows a community to swap expensive debt for new bonds with a lower interest rate. Issuers offer to buy bonds at a specific price on a specific date, usually above the current market value but still low enough for the government to realize savings.

This has become a popular tactic in recent years after changes in federal tax law eliminated a common type of refund.

The offers are seeing “a lot more uptake” in new loans these days, said Jeff Scruggs, head of the public sector and infrastructure group at Goldman Sachs Group Inc. “The effort is on the selling and trading side, trying to get investors to tender their bonds .” .”

States, cities and other issuers offered to buy back about $30 billion in municipal bonds last year and are on track to achieve a similar amount in 2024, according to an assessment by Barclays Plc. The bank estimated that less than half of that amount was successfully tendered.

In the Florida transaction, investors have until October 23 to decide whether to sell back their bonds. The state is offering to offer about $165 million in turnpike corporate debt, $90 million in so-called right-of-way bonds for a state transportation program and $245 million in public education bonds.

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