Commission recommends variable-rate demand bond structure, TD Bank letter of credit for $116M gas-and-fuel refunding

The State Bond Commission on Oct. 16 authorized staff to pursue a variable-rate demand bond structure with a TD Bank liquidity facility to refinance up to $116 million of outstanding 2022 gas-and-fuel tax bonds (item 42).

Prag Municipal Advisors and the evaluation team briefed the commission on proposals received from the state’s investment banking pool and recommended a bank-supported variable-rate demand bond (BRVD/VRDB) structure with a TD Bank letter of credit and TD Financial Products as remarketing agent.

Advisers explained why alternative structures were not recommended: converting to fixed-rate bonds would require a termination payment on the existing interest-rate swaps and the issuance of additional bonds to fund that payment, adding significant cost. Synthetic floating-rate approaches were described as complicated with interactions between existing and proposed swaps, and floating-rate notes (FRNs) currently faced wider spreads and reduced investor appetite.

A VRDB/BRVD structure, advisers said, is standardized in the market, can be issued publicly and typically attracts tax-exempt money market funds and liquidity-seeking investors. Under the structure, daily or weekly interest-rate resets are remarketed by the remarketing agent; failed remarketings draw on the liquidity facility provided by the bank. The resolution authorizes a maximum interest parameter (not exceeding 12 percent) to accommodate market variability; advisers said the higher cap is a market standard to allow for exceptional rate movement and does not represent an expectation of sustained 12 percent interest. If a liquidity provider fails to perform, the bonds convert to a default rate or the state can move to a replacement provider.

Staff noted that a similar structure was used for the 2023A gas-and-fuel issuance and has produced variable daily rates ranging from about 0.4% to 4.75% and averaging roughly 2.5% through Sept. 30; recent resets in the week before the meeting ranged about 2.0%–2.25%.

The evaluation team recommended moving forward now with the TD Bank proposal because it was expected to yield lower spread and lower cost compared with other options and because the existing bonds are callable Nov. 1 and have a mandatory tender on May 1, 2026. Representative Romero moved approval of staff’s recommendation and the preliminary resolution; Senator Stein seconded and the commission approved by voice vote.

Why it matters: the recommended structure seeks to reduce net interest cost while preserving liquidity and market access in a period of uncertain rate trajectory. The commission authorized staff to engage TD Bank and to publish notice of intention, with a supplemental resolution planned for the next meeting for final approval.