WASHINGTON - The District of Columbia plans to come to market with its first-ever income tax-secured bond deal in a negotiated sale tomorrow and Wednesday after the $445 million of bonds grabbed higher ratings from all three rating agencies last week.
"Of course we were thrilled to get the triple-A from Standard & Poor's, and the two double-As from Moody's Investor Service and Fitch Ratings. We think that's a great achievement for us," said district Treasurer Lasana Mack. "I think there's a pretty strong pre-deal buzz going on, so we're expecting a strong reception from the market."
Standard & Poor's gave the deal a AAA with a stable outlook last week, the district's highest rating ever received on any of its bonds. Moody's rates it Aa2 with a stable outlook and Fitch rates it AA with a stable outlook.
Moody's senior analyst Nick Samuels said the rating on the deal is higher, relative to the district's general obligation bond rating of A1 from Moody's, mainly because of the structure, which includes a dedicated revenue stream of personal and business income taxes that are pledged directly to bondholders.
"In this case, you've taken a very strong revenue stream, created a strong legal structure around which [the money] goes to the trustee and is isolated from any fiscal stress that the district might have in its general fund," Samuels said. "You're accumulating funds in advance of debt-service payments to make up for any deficiency in debt-service set-asides ... You've really isolated them from [going to the district's general fund] until sufficient amounts for the next year's debt service are on hand."
Moody's said the pledged revenues provide "healthy coverage" of maximum annual debt service of the full $3 billion that the District Council authorized the district to issue, even during periods of economic stress.
For example, by incorporating a 16.1% forecasted decline in the current fiscal year, the maximum annual debt service coverage is 6.1 times pledged revenues, and it increases to 7.6 times in 2013 based on current estimates, Moody's said.
In a stress scenario with a 18% drop in current year pledged revenues, 10% in fiscal 2010, and a 2% decline annually through 2013, coverage is still maintained at more than 5 times, according to Moody's.
Proceeds of the $310 million of Series 2009A income-tax secured new-money bonds will finance capital projects and $135 million of Series 2009B income-tax secured refunding bonds will refund certain maturities of the district's Series 2003C GO auction-rate securities and the Series 2003D1-3 GO variable-rate demand obligations, which currently have liquidity support through a standby bond purchase agreement provided by Depfa Bank.
Senior book-runner on the deal is Merrill Lynch & Co. Co-senior manager is Barclays Capital. Senior managers are Siebert Brandford Shank & Co. and Morgan Stanley. Co-managers are Citi, Goldman, Sachs & Co., JPMorgan, Loop Capital Markets LLC, M.R. Beal & Co., RBC Capital Markets, Raymond James & Associates, and Wachovia Securities.
Bond counsel is Bryant, Miller Olive LLP. Disclosure counsel is Hawkins, Delafield & Wood LLP. Orrick Herrington & Sutcliffe LLP and McKenzie & Associates are underwriters' counsel. Financial advisers on the deal are Public Resources Advisory Group and Phoenix Capital Partners.
The income tax bonds, which were authorized in legislation approved by the council in July, are a new debt tool that finance officials hope will provide higher ratings and lower interest rates. The deal is the first of roughly $2.9 billion of bonds. The income tax bonds are an alternative to issuing GOs, which Mack said will not be negatively affected by the new bonds.
"Over time, it may even help the GOs by making them a little more scarce" to investors, Mack said. "It's going to produce substantial debt-service savings for us. Given the current market conditions, the credit spread ... is pretty wide, so that makes for a substantial benefit to us from issuing these bonds as opposed to GOs at this time."
The current spread between a triple-A rated, 10-year GO and a A-rated 10-year GO is 138 basis points, according to Municipal Market Data. The new bonds could save the district $4 million in interest payments in the current fiscal year and $28 million over four years, district officials said.
Meanwhile, Ritta McLaughlin, who worked at JPMorgan in tax-exempt capital markets investment banking, will join the district's financial staff as a deputy treasurer at the end of the month, district officials said. McLaughlin also previously worked at Bear Stearns in municipal finance.
