D.C. Boosts Income Tax Bond Deal

The District of Columbia on Tuesday issued $810 million of income tax-secured bonds - nearly double the $445 million previously planned - at an average interest rate of 4.84% after finding strong demand from retail and pricing the bonds a day early for institutional investors, said chief financial officer Natwar Gandhi.

The district increased the negotiated deal to $500 million of Series 2009A income tax-secured new-money bonds from $310 million, and $300 million of Series 2009B income tax-secured refunding bonds from $135 million. It sold the bonds to retail investors on Tuesday and had planned to market them to institutional investors yesterday. But "as the sale progressed, the response was so positive that our underwriters recommended increasing the size and making it available to all investors at one time," Gandhi said.

District Treasurer Lasana Mack said strong retail investor demand was a major factor in the district being able to sell the larger amount of bonds.

"It was something investors hadn't seen before, a totally new District of Columbia credit, a very highly rated credit," Mack said. "And in this market, there's definitely a premium placed on highly rated bonds. We think all of those things contributed to the strong reception."

The $500 million of new-money bonds will mature 2010 through 2027, with term bonds in 2030 and 2034. Based on pricing information on Tuesday, Merrill Lynch & Co., lead book-runner on the deal, offered bonds maturing in 10 years at a 5% coupon and a yield of 4.29%. Bonds with the longest maturity were offered at a coupon of 5.25% and a yield of 5.32%.

The $310.7 million of income tax refunding bonds will mature 2010 through 2027, with a term bond in 2029. Refunding bonds maturing in 10 years were offered at a 5% coupon and a yield of 4.29%.

Pauline Schneider, a partner with Orrick Herrington & Sutcliffe LLP, co-underwriters' counsel on the deal, said that because the district was authorized to issue more than $900 million of the bonds this year, finance officials had some flexibility on the deal's size.

"Initially ... they weren't sure what market receptivity would be, and with the crazy market, nobody's quite sure how it's all going to work out," Schneider said. "But they had a thoughtful discussion about whether they wanted to go out with the full authorization or whether they would rather go out with a lower number. They went out with a lower number, but the market was obviously more attractive [Tuesday]."

Schneider said there were a number of reasons that the demand for the bonds was stronger, one of which is that there are not a lot of issuers that sell income tax-secured bonds, making them rarer and more enticing to investors who may want to diversify their portfolios.

"But another one of the reasons that this was viewed as more attractive, perhaps, is that the [debt-service] coverage was so high and you had a pledge of this particular revenue stream," Schneider said. "It was a good time to be in the market [Tuesday], and the results are clear."

The district structured the bonds to have a dedicated revenue stream of personal and business income taxes that are pledged directly to bondholders, a reason for the high marks the deal received from all three rating agencies, which were also a boon to the offering, officials said.

Standard & Poor's gave the deal a AAA with a stable outlook, which is the highest rating the district has ever received on any of its bonds. Moody's Investors Service rated it Aa2 with a stable outlook and Fitch Ratings rated it AA with a stable outlook.

The bonds are the first of roughly $2.9 billion that the district is authorized to issue and are an alternative to general obligation bonds. Proceeds of the new-money portion of the deal will finance new capital projects and the refunding portion will refund outstanding GOs.

The income tax bonds could save the district $4 million in interest payments in the current fiscal year and $28 million over four years, district officials said. "It's very difficult to precisely say what our savings are versus GO bonds because we weren't issuing GOs," Mack said. "But having said that, we stand by the numbers that we previously produced in terms of the estimated savings from using income tax bonds versus using GOs."

"We may issue some additional income tax bonds [this year] to refund some additional GO bonds outstanding where there is a potential for savings," Mack said.

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