Pennsylvania officials Wednesday slashed an upcoming $600 million competitive general obligation deal in half due to market conditions, while the state's largest city, Philadelphia, gears up for its biannual negotiated GO sale.
The Keystone State will now sell $300 million of GO bonds on Tuesday via competitive bid as the state by law cannot sell GO debt through negotiation.
"Based on feedback we've received and advice of our financial advisers it would be in our best interests to reduce the par amount in order to receive the best possible bids based on current market conditions," said Rick Dreher, director of the bureau of revenue, cash flow, and debt in the Budget and Administration Office. "So, it's basically in response to market decisions."
The state tends to sell debt twice a year, but in the future may borrow more frequently in smaller quantities to better price its GO bonds. Dreher said the decision to decrease the size of the deal was not related to a $300 million taxable Port Authority of New York and New Jersey note sale that failed to attract bids.
"We were leaning this way late last week and into Monday," Dreher said. "I really think that our tax-exempt GO is quite a different market than the Port Authority taxable deal. So we're still hopeful that with a reduced sizing that we'll be able to sell a competitive deal on Tuesday, but certainly stand ready to take any action if necessary."
Philadelphia is set to follow the state with $185 million of new-money GOs on Wednesday. Morgan Stanley will price the fixed-rate bonds and Merrill Lynch & Co. and Siebert Brandford Shank & Co. will serve as co-senior managers, according to city Treasurer Rebecca Rhynhart.
Public Financial Management Inc. and Acacia Financial Group Inc. are the city's financial advisers and Cozen O'Connor and Booth & Tucker LLP are co-bond counsel.
This will be the city's first new-money GO transaction since 2006 as Philadelphia typically issues every other year. Rhynhart said the city plans to hold an investor call next week - which Philadelphia hasn't done in the past - to help attract bondholders to a volatile market. In addition, officials are focused on finding the right window of opportunity to price the bonds.
"We do have flexibility and we understand that it's a tough market," Rhynhart said. "So, what we're planning to do is to get ready to price by printing the POS and being ready by the middle of next week so we can price at the opportune moment in this market."
Standard & Poor's and Fitch Ratings rate the transaction BBB and BBB-plus, respectively. Moody's Investors Service rates the bonds Baa1.
The city has $1.14 billion of outstanding GO debt and $2.75 billion of unconditional general fund lease-backed bonds. In fiscal 2009, which began July 1, the city paid $278 million in debt service, with $86 million covering GO bonds and the remaining $192 million servicing lease-backed debt, Rhynhart said.
Along with the outstanding bonds, the city has an unfunded pension liability of $3.8 billion, with 54% of the program funded. Philadelphia has been looking to sell $3.5 billion of taxable pension bonds to help support that program, but market conditions have forced a wait for better rates.
Last month, Mayor Michael Nutter announced that he will lay off city workers and eliminate vacant positions, curb spending, and reduce recreational programs to help fill a $108 million gap in the $4 billion fiscal 2009 budget. The city could face a $1 billion shortfall over the next five years.
"While the unfolding economic downturn has already had a substantial impact on the city's operating budget, further deterioration of general fund revenues beyond recently modified financial projections could result in a revision of the rating outlook, a rating downgrade, or both," according to a Fitch release. "Although Fitch believes the city's management team has been proactive in making significant budgetary adjustments, a high fixed-cost burden and a historically narrow general fund balance severely limits the city's ability to absorb further revenue declines."
