County nets $75.4M in competitive sale of bonds

Maui County received an average 2.6 percent interest rate on 20-year bond sales that netted a total of $75.4 million, county Finance Director Danny Agsalog has announced.

The county’s competitive bond sale on June 26 of $68.7 million, which is what the county paid, with a premium net proceed of $75.4 million, which is what the county received, was a “function of the current bond market and the very low interest rates,” said Agsalog.

There were 15 bidders in the sale with J.P. Morgan LLC making the lowest bid at an average true interest cost of 2.6 percent, which includes the actual cost of the bond issuance and is the average of all the interest rates and underwriter fees.

In the current market, Agsalog said that more investors demand premium bonds than par or discount bonds. The bidder believes that they can sell the bonds at a rate that nets them an acceptable return.

The bond premium paid at the time of purchase is recouped through higher coupon payments, according Raymond James, a financial services company. But Agsalog added that few bonds were issued so total payments ended up being less – which was the goal.

Agsalog said that the administration decided to do a competitive rather than negotiated bond sale, where an underwriter negotiates interest rates and underwriting fees. In the competitive process, the county allowed the marketplace to determine how much of the $75 million goal would be represented by bonds and by bond premiums, within parameters.

This is only the second time Maui County has offered its bond sale in the competitive method, and currently, is the only Hawaii county selling bonds in this method, according to a county news release. Most bond offerings by the state are through negotiated sale.

“Our goal was to get the lowest annual payments,” Agsalog explained in an email. “Whichever bidder bid the lowest overall payments on a present value basis won the bid.”

He said that the county met the Government Finance Officers Association criteria for a competitive sale, which included bond ratings at least in the single-A category. Moody’s gave the county an Aa1 rating, the second highest bond rating, and Standard & Poor’s and Fitch, a AA+, a step below the top AAA rating.

The risk in competitive sales is that the bond sale may attract only a few or no bidders or that the interest rate bid is higher than what could be achieved in a negotiated sale, Agsalog explained. With only a few bidders, there might not be advantage of competitive bidding on the market.

“However, when many bids are received this risk dissipates and in the case of Maui with 15 bids, this risk is very low,” he said. “Based on comparables, it does not appear that a negotiated sale would have been superior to the competitive sale results achieved.”

He added that from March 1 to June 16 general obligation bond sales of AA or better, between $50 million and $100 million, 11 were sold by competitive sale and nine by negotiated sale.

The county could have dictated that all bids be at par or $75 million with no premium or discount but that would have limited the bidding and raised interest cost, he said. Negotiated deals also are sold with significant premiums.

Out of the $75.4 million in bond proceeds, $51 million will be used to fund new and ongoing capital improvement projects and $24 million went to refunding.

The county refunded its 2004 and 2006 bond series and saved $2.1 million. The 2004 series had a remaining interest cost of 4.2 percent and the 2006 series had a remaining average interest cost of 4.8 percent, Agsalog said.

* Lee Imada can be reached at