CHICAGO - Kansas City, Mo., will roll out a series of new and restructuring transactions over the next month - beginning today with the sale of $200 million of water bonds - as the city seeks to raise funds for projects and resolve issues stemming from the failure of its insured variable-rate debt.
The city will take retail orders today and price the bonds institutionally tomorrow. Merrill Lynch & Co. is the senior manager. Public Financial Management Inc. and TKG & Associates are financial advisers, with Gilmore & Bell and the Martinez Law Firm serving as bond counsel. The bonds carry an A1 from Moody's Investors Service and a AA-plus from Standard & Poor's.
After the water revenue bonds price, the city is tentatively slated to sell $75 million of new-money sewer revenue bonds during the second week of March. George K. Baum & Co. is the senior manager.
Kansas City then will turn to a series of restructurings beginning on March 17 with the remarketing of about $180 million of appropriation-backed bonds issued for the KC Live entertainment district through the city's Industrial Development Authority. All the bonds are currently held by liquidity provider Depfa Bank PLC and the city was under pressure to act, as an accelerated payment schedule begins in April.
Three tax-increment financing refundings totaling about $36 million involving bank-held, insured variable-rate bonds will follow the KC Live deal.
All the deals have long been in the works, with the variable-rate restructurings held up as the city weighed its options amid growing costs for liquidity since the city first took bids last spring.
"The costs have risen from 50 basis points to 200," said Kansas City Treasurer Randall Landes.
The city sold variable-rate bonds earlier in the decade to help finance a new arena, an expansion of its convention center, and public improvements for the KC Live entertainment district, all part of a massive rejuvenation of downtown. All of the issuance used a variable-rate structure with insurance from Ambac Assurance Corp. Faced with higher rates and failed remarketings, the city was able to complete the restructuring of its $213 million of arena bonds and $100 million of convention bonds last summer.
The KC Live transaction was held up as the financial crisis spread to European banks and German-based Depfa - which was to provide the new letter of credit for the restructuring - was downgraded. Landes went back to the drawing board.
After rejecting a fixed-rate structure because of the steep costs of terminating swaps tied to $135 million of the KC Live bonds, the city settled on a plan to remarket the bonds with JPMorgan serving as remarketing agent and JPMorgan Chase Bank NA providing a direct-pay letter of credit.
Kansas City faced an accelerated payment schedule on the Depfa-held bonds of $36 million quarterly beginning in April, Landes said. "We were hurdling towards the term-out, so we needed to resolve this," he added.
The City Council recently approved the plan. The KC Live district project has come under heightened scrutiny due to the lackluster performance of retail sales that go to repay the bonds. While the recession is affecting sales, about half of the retail space available in the project remains vacant.
Officials anticipate a $4 million shortfall in the current budget in pledged revenue and $7 million next year. The bonds carry a special obligation appropriation pledge so the city must dip into general fund revenues.
Officials opted for a floating-rate initially on the downtown projects because it provided flexibility, as the final costs of the projects were determined and allowed the city to capture the benefits of the lower rates on the short end of the yield curve - at least until early last year.
Once the KC Live deal is completed, Kansas City's debt portfolio will include 79% at a fixed rate, 5% synthetically fixed, and 16% unhedged variable rate, compared to 64%, 16%, and 20%, respectively, a shift that Landes hopes will shore up the city's credit.
Fitch Ratings assigns a AAA rating to Kansas City's $308 million of outstanding general obligation bonds and a AA to its $1.2 billion of special obligation bonds backed by an appropriation or lease. Standard & Poor's rates the debt AA and AA-minus, respectively, while Moody's assigns a Aa3, and A2.
Fitch and Moody's both assign the credits a negative outlook, citing in part the strain posed by the floating-rate debt and market turmoil.
"The focus of our restructurings is credit-driven. Hopefully by resolving these market-driven issues, we will improve the city's credit fundamentals," Landes said.
The three TIF issues that carry insurance from MBIA Insurance Corp. include $7 million for a residential and commercial project. US Bank currently holds the failed bonds and will provide an LOC on the refunding with Wells Fargo Brokerage Services LLC serving as remarketing agent. A $17.5 million TIF bond that financed the restoration of a historic hotel is currently held by JPMorgan, which will provide an LOC for the refunding. It will be combined with the refunding of a $12 million TIF bond. JPMorgan also currently holds those bonds. Banc of America Securities LLC will serve as remarketing agent.
The water issue was also planned for the late summer or early fall, but was delayed due to the market crisis. The rising interest rates forced the city to shelve the deal because the refunding piece would no longer achieve savings. The refunding was needed to pave the way for the city to establish a new, more modern master bond ordinance for the water revenue bond program.
"The purpose is to revise the covenants, and we don't want to lose money to revise covenants," Landes said.
Kansas City now expects to break even or achieve some small present-value savings. In today's sale, the city will raise about $69 million in new money with the rest going to refund outstanding debt. The new money will finance improvements to the water system's distribution infrastructure and primary treatment plant.
The rating "reflects the system's large service area ... a stable regional economy; improving debt service coverage levels following consecutive rate increases; adequate net working capital; favorable debt profile with future borrowing expected; and satisfactory legal covenants that have been strengthened as part of the new master ordinance," Moody's wrote.
Debt service coverage was at 1.29 times in fiscal 2008. The system serves 153,000 retail customers.
