San Jose Switch Draws Buyers

The San Jose Redevelopment Agency this week successfully sold $37.2 million of tax-exempt bonds that found no buyers as taxable debt in late October.

The agency decided to restructure the deal after it got no bids on a $30.2 million of taxable tax-allocation bonds on Oct. 28. San Jose was able to restructure the deal by changing the project list on the financing. Technically, this week’s deal was a different bond issue, but it did free up funds for the original taxable projects.

For instance, the Redevelopment Agency agreed to borrow in the tax-exempt market to pay for a city sewer plant that it had previously planned to fund on a pay-as-you-go basis. That freed up cash that the city used to fund the agency’s taxable projects.

“Tax-exempt deals are getting done, but taxable deals are not,” said agency financial adviser Gary Kitahata, the principal at Kitahata & Co. in San Francisco. “So we had to find a way to do it tax-exempt.”

He said the agency was relieved to get a deal done, but added that it paid a premium to raise funds in an increasingly shallow market for single-A rated debt. The true interest cost on the bonds was 6.62%. The longest maturity was just 10 years.

The agency got one bid from a pool of seven firms that had registered as potential bidders. The winning bid came from Citi, which headed a group that included Stone & Youngberg and Morgan Stanley.

“That group included two of the firms that ordinarily, in less tough times, might have submitted bids on their own,” Kitahata. “That’s just a reflection of how hard the market is these days.”

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