Philly Nabs $275M Short-Term Loan From JPMorgan

JPMorgan will extend $275 million of its brotherly love to the city of Philadelphia - at a rate of 3%.

Gridlock in the Pennsylvania legislature has prohibited Philadelphia from issuing $275 million of tax and revenue anticipation notes in the municipal market. That has left the city in a liquidity crunch and behind in its payments to vendors.

Earlier, Philadelphia officials had anticipated that state lawmakers would pass by Aug. 31 a bill to help balance the city's fiscal 2010 budget and enable it to access the muni market. Those expectations changed after House Democrats last week announced they would not vote on the bill until Sept. 8, forcing the city to wait even longer.

Enter JPMorgan, which will loan Philadelphia $275 million at a rate of 3%, with that rate to increase to 8% on Dec. 1, unless it repays the loan before then with public Tran proceeds. City officials expect to draw $200 million on Thursday to paydown a portion of outstanding vendor bills that total $225 million. That leaves $75 million of the JPMorgan loan remaining that the city could tap into, if need be.

Philadelphia Treasurer Rebecca Rhynhart said JPMorgan approached the city once Mayor Michael Nutter announced in mid-July that it would halt payments to its vendors as HB 1828 continued to stall in the legislature.

HB 1828 would balance the city's budget by increasing Philadelphia's sales tax by one percentage point to 8% until 2014 and allowing it to defer $235 million, in total, of its pension contribution payments this year and next.

"That's when our discussions started and we did reach out to a few other banks, but no other bank seems to be offering the type of product in terms of JPMorgan notes," Rhynhart said.

The short-term JPMorgan loan will give the city additional liquidity as it currently has more than $200 million of cash on hand. If the legislature passes HB 1828 on Sept. 8, the bill would then head to Gov. Edward Rendell for his signature and Philadelphia would move forward with its public note offering that would pay off the JPMorgan loan.

"So we'll do that as soon as we get that approval and it takes about a month to get to [the market] once we get that approval, but our expectation is to get that refinancing done well before Dec. 1 so we would not experience that rate of 8%," Rhynhart said.

Philadelphia isn't the only jurisdiction to receive credit from JPMorgan. The bank last month extended $1.5 billion to California, and in June it offered a $2 billion cash-flow borrowing facility to New Jersey, which it did not tap into.

While JPMorgan's 3% interest rate is higher rate than what the market would offer the city in a public Tran deal, Rhynhart and Philadelphia finance director Rick Dubow anticipate the upcoming fiscal 2010 Tran sale will not grab the low 2% interest rate the city paid on its fiscal 2009 note deal.

"Right now I would say there's a lot of uncertainty about our finances, so it's pretty clear we weren't going to be able to get, at least right now, the rates we got last year," Dubow said.

The city will begin paying the outstanding vendor payments next week, but will not make regular allocations to its suppliers until lawmakers pass HB 1828 and also approve the state's fiscal 2010 budget. Pennsylvania has been operating without a complete state budget since July 1.

Without HB 1828, Philadelphia will be forced to begin layoffs of roughly 3,000 city employees and implement drastic service reductions beginning Oct. 2. Those service changes include closing libraries, after-school programs, and senior centers, as well as reducing trash collection to twice a month from the currently weekly pick-up.

Philadelphia has $1.32 billion of general obligation debt. Fitch Ratings and Standard & Poor's rates it BBB-plus. Fitch placed the city on negative watch in mid-June while Standard & Poor's gives it a stable outlook. Moody's Investors Service rates Philadelphia Baa1 with a negative outlook.

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