New York City plans this month to convert more than half of its $2 billion of general obligation bonds in auction-rate mode to fixed-rate bonds and variable-rate demand bonds through a $1.3 billion refunding. In addition, at the same time the city will also refund $140 million of VRDBs insured by Financial Guaranty Insurance Co.
The city plans to begin selling a portion of that refunding tomorrow with a three-day retail order period on $366 million of tax-exempt fixed-rate bonds.
Merrill Lynch & Co. will lead manage the sale and Bear, Stearns & Co., Citi, and Morgan Stanley will be co-senior managers.
Part of the refunding includes the competitive sale of $82 million of taxable fixed-rate bonds on Tuesday. The remainder of the refunding bonds will be sold in coming weeks as uninsured variable-rate demand bonds at dates to be announced, and closing on or about April 1.
Auctions on some of the city's auction-rate securities have failed since widespread market dislocation began a little more than three weeks ago. The city did not announce which series of auction-rate securities would be taken out but deputy director for finance Alan Anders said that they were refunding maturities of auction-rate securities generally inside of 10 years with the fixed-rate portion.
"We're still structuring the deal so we want to be very careful about announcing [which series would be taken out] publicly to everybody and we're not prepared to announce it today," Anders said. "The market's pretty sensitive, particularly if they're failed auctions."
Liquidity providers for the variable-rate bonds were chosen from a request for proposals put out last month but the names of the banks providing liquidity were not released yesterday.
"We're using most of ... the bank capacity that we got but it wasn't enough to eliminate all of the auctions, so this is a very significant first step to other steps that we'll take in the future," Anders said.
New York City director of investor relations Raymond Orlando said that the city had not made a final decision on whether or not it would refinance all of its auction-rate securities.
Joseph Darcy, senior portfolio manager at Dreyfus Corp., said that if yesterday's strong appetite for California GO and New York State Thruway Authority debt was an indicator, then the city's refunding should be well received.
"Based on what we've seen over the last day or so, the environment is ripe for it," Darcy said. "It's encouraging to hear that in trying to restructure some of their auction-rate debt, they're not abandoning the short end of the market as a financing vehicle. For an issuer to be maintaining a proper mix of both short-term and long-term obligations in their debt portfolio is prudent debt management."
Standard & Poor's assigns the city its AA rating. Moody's Investors Service assigns a Aa3 and Fitch Ratings assigns a AA-minus.
Also yesterday, in testimony before the New York City Council, city budget director Mark Page said that he had instructed agencies to find an additional 3% of cuts for fiscal 2009 on top of a 5% cut that was included in Mayor Michael Bloomberg's preliminary budget. Page also criticized New York Gov. Eliot Spitzer's proposed budget as shortchanging the city.
"Unless the budget adopted by the state is realigned to address the $747 million shortfall aimed at New York City in the state executive budget, this further reduction will not even compensate for the threatened direct hit from the state," Page said in prepared testimony.
State budget director Laura Anglin shot back in a statement that Spitzer's proposed budget would have a net positive impact for the city of nearly $671 million. Page's testimony was "inaccurate and highly misleading," Anglin said. "He is attempting to shift the blame for the city's budget cuts from where it rightly belongs: the economic downturn that is affecting every level of government."