SAN FRANCISCO - A slate of San Francisco redevelopment deals last week could help revive a sluggish market for California tax allocation bonds, the underwriter believes.
The San Francisco Redevelopment Financing Authority priced $168 million of uninsured tax allocation bonds in four different series last week.
"We had a lot of institutional buyers, and buyers who were on the sidelines jumped in," said John Kim, principal at De La Rosa & Co., lead manager for the three-series, $93.1 million tax-exempt side of the deal. Piper Jaffray & Co. was lead manager for a $75 million taxable series.
Kim said the deals should help rejuvenate what has been a somewhat lackluster market for California TABs. According to De La Rosa, before the San Francisco deals, only 24 issues for $339 million had been sold so far this year, all negotiated.
By comparison, in 2008, there were 57 issues for $1.24 billion, including 16 competitive deals.
Redevelopment agencies generate their revenue from property tax increment. After a base year value is set, when property valuations rise in a redevelopment area, the incremental revenue flows to the redevelopment agency.
The San Francisco deals represented three different redevelopment areas, with distinct ratings from the single-A level to triple-B.
Those rating levels, which are typical for California redevelopment areas, have suffered the most since last year's market meltdown and the evaporation of most bond insurers, Kim said.
But he said many investors who have been on the sidelines put in orders for the San Francisco deals - for the $26 million tax-exempt Series C, for example, which went out with an A-minus Standard & Poor's rating, Kim said there were 14 institutional buyers plus a "wide array" of retail investors. Those investors were attracted by yields ranging from 3.54% for the 2013 maturity, 6.23% for 2029 bonds, and 6.55% for 2039. The $49.8 million tax-exempt Series D, rated BBB by Standard & Poor's, offered 3.86% for 2013, 6.44% for 2029, out to 6.74% for 2039.
"I think San Francisco was the beginning of a trend where we will see tax-increment spreads coming down," said Benjamin Stern, De La Rosa's head of sales and trading.
San Francisco itself was a selling point. The most recent citywide property tax valuation was up 6% at a time when many California locales are reporting declining tax rolls.
"That demonstrates that San Francisco real estate has been resilient," Kim said. "The San Francisco name was attractive, the underlying real estate."
Redevelopment agencies around California took a hit recently, when the state in July adopted a budget bill shifting $2 billion from redevelopment agencies to boost the state general fund, including $1.7 billion in the current fiscal year.
The San Francisco Redevelopment Agency is scheduled to make a $28.7 million payment, according to the California Redevelopment Association, which has promised to challenge the fund shift in court.
A trial court rejected a similar state budget shift last year, though the state has appealed.
Investors did demand explanations of how the San Francisco agency would be affected by the so-called SERAF - supplemental educational revenue augmentation fund - shift, Kim said.
The bottom line, he said, is that the agency has enough resources to handle the shift and experience in budgeting for previous state fund shifts.
The topic takes up about two pages of disclosure in the bonds' official statements.
