WASHINGTON — The District of Columbia could garner its lowest new-money, fixed interest rates ever when it couples income tax-secured revenue bonds with its first taxable Build America Bonds in an expected $661 million negotiated deal scheduled for early December.
Treasurer Lasana Mack told members of the District Council last week that interest rates could be between 3.5% and 3.75% with the BABs’ 35% federal subsidy added to the taxable interest rate. Mack said he is hopeful that the district will be able to issue the full amount as BABs.
The income tax-secured bonds have become the district’s preferred debt security since it received a AAA rating from Standard & Poor’s in March, the highest rating ever for district debt. When the district priced the bonds days later, intense investor demand allowed underwriters to almost double the size of the deal to $810 million from $445 million. The bonds were sold at a 4.84% average interest rate.
The district will return to the market next month with ratings affirmed for its income tax bonds — AAA from Standard & Poor’s, Aa2 by Moody’s Investors Service, and AA by Fitch Ratings, district officials said. The district’s general obligation bonds are rated A1 by Moody’s and A-plus by both Standard & Poor’s and Fitch.
The District Council must approve every issuance of income tax bonds and it is expected to vote on the resolution tomorrow.
The district also sold in August $270 million of income tax bonds, in a refunding of previously issued GO debt, that was also overbid. The average interest rate was 3.39%, with yields ranging from a low of 1.04% in 2011 to a high of 4.41% in 2028.
The income tax bonds have received strong demand partly because they offered investors diversity in addition to security, sources said. Few municipalities as large as the district offer income tax-secured bonds. The bonds offer a pledged income tax revenue stream that is deposited directly with a trustee bank.
The district’s December deal could fuel further diversification for investors, and savings for the district, as BABs connect the district’s debt with investors in the taxable market. The BABs will allow the district to reach “flight-to-quality” investors who have turned to the safety of Treasuries amid the credit crisis and economic recession, Mack said.
BABs “allow us to tap into the marketplace of those investors who are buying Treasury securities and give them an investment that is secure,” Mack told Council members.
BABs will pay investors more in interest than Treasuries, “so it is an attractive investment for them,” he said.
And to further sweeten the savings for the district, the BABs are coming to market in a near-decade-low interest rate environment. Interest rates on triple-A GO bonds have been declining since the district’s first income tax bond deal. In March, the Municipal Market Data triple-A yield curve scale was 4.85% in 25 years, the longest maturity the district can issue. As of last Tuesday, the scale for a comparable maturity was 4.14%. The 10-year average on the triple-A GO scale in 25 years was 4.75%, according to MMD.
A final maturity scale for the bonds will be determined closer to pricing, Mack said.
JPMorgan and Loop Capital Markets are the lead underwriters on the deal. Barclays Capital, Goldman, Sachs & Co., Bank of America Merrill Lynch, Citi, Morgan Stanley, M.R. Beal & Co., Ramirez & Co., Rice Financial Products Co., Siebert Brandford Shank & Co., and Wells Fargo Securities are co-underwriters.
Venable LLP is bond counsel and Edwards Angell Palmer & Dodge LLP is disclosure counsel. The underwriters are represented by Hogan & Hartson LLP and McKenzie & Associates.
Public Resources Advisory Group and Phoenix Capital are the district’s financial advisers.
The bonds will be issued for pre-approved district projects. About half of the proceeds will fund public school improvements completed in fiscal 2009, which ends Sept. 30. The district had been financing school projects on a pay-as-you-go basis, but turned to debt financing this year as general fund revenues have declined.
City Council chairman Vincent C. Gray called the move to halt pay-as-you-go financing “prudent” because it has allowed the district “to continue to invest in modernization of schools,” Gray said at the hearing.
Later this year or early in 2010, the district also plans to issue its $33 million allocation for 2009 qualified school construction bonds for charter schools. District officials said they plan to issue the 2010 allocation, also $33 million, for public schools in the first quarter of 2010.
The district is looking to issue both recovery zone economic development bonds and recovery zone facility bonds for its convention center hotel construction. However, that proposal has stalled amid a lawsuit blocking construction.
Meanwhile, the district’s budget shows the same scars from the economic recession as most other municipalities across the country.
Revenue estimates for fiscal 2009 and revenue projections for fiscal 2010 from the district’s chief financial officer, Natwar Gandhi, were unchanged in September following four consecutive quarterly declines through June. The June revenue estimate showed revenues dropped $190 million in fiscal 2009 and projected a $150 million revenue decline in fiscal 2010.
The district had about a $952 million spending gap in fiscal 2010 that was closed with spending cuts, a sales tax increase, and $169 million of federal stimulus funds.
Gandhi said in a statement accompanying the September estimate that the economic outlook “has improved somewhat” since the June estimate.
“Uncertainty is still great and risks remain for both the national and local economies,” Gandhi said.
The CFO makes revenue estimates four times a year and is expected to announce updated figures in December, district officials said.
The revenue declines mean the district’s debt service-to-expenditure cap will not allow for “big-ticket spending plans” in the near future, Mack said. To boost its credit rating, the district approved a 12% debt service-to-expenditure cap in December 2008. With the current $661 million deal included, the district’s debt service-to-expenditure ratio will be 11.2% to 11.3%, Mack said. If district revenue increases next year, then the debt-service-to-expenditure ratio will go down, Mack said.
The budget problems have not posed a serious threat to the district’s credit, rating agencies have said.
In a November report on the greater Washington metropolitan area, Moody’s said the district’s budget actions “have helped to put it in a strong relative position to weather the current downturn.”
The U.S. government, the largest employer in the district, has retained jobs throughout the recession as private-sector companies have shed workers, Moody’s said.
District employment grew through the economic downturn, “especially amid increased federal economic stimulus activities and new financial services regulatory efforts,” the report said.
