N.Y.C. TFA Pairs Competitive BAB Sale and Private Placement With Lottery

The New York City Transitional Finance Authority next week plans to privately place $375 million of Build America Bonds and traditional taxable municipal bonds with the New York State Division of Lottery and to market its first competitive BAB deal as part of a $900 million transaction.

The TFA announced Thursday that it's offering the new-money bonds on its future tax-secured subordinate-lien credit, which is backed by the city's personal income and sales taxes.

The private placement and the public competitive sale will be structured to mirror each other, with similar serial and term maturities of up to 30 years. The competitive pricing, scheduled for Tuesday, will largely determine the yields on the private placement to the lottery.

"The structure will be similar enough so that competitive sale maturities will line up with the lottery's," said city Office of Management and Budget spokesman Ray Orlando.

The deal consists of five subseries: two BAB subseries of approximately $308 million; two traditional taxable subseries of about $67 million; and one tax-exempt variable-rate demand bond subseries of roughly $150 million that will be marketed on or about the transaction's March 3 closing date.

The OMB "has thought for quite some time that competitive deals from time to time are a good market discipline on the negotiated deals that we do, not a replacement," deputy budget director Alan Anders said.

The privately placed bonds won't have an underwriter which will save the city takedown costs, he said.

"The state's getting the same rate as the public," Anders said. "To the extent that there's not a reduction in proceeds to pay the takedown there's a benefit to the city, but it's not huge — that's not driving the transaction."

The state approached the city about the deal, according to Anders.

"This transaction will provide significant savings to the state, while keeping the lottery prize fund whole through the purchase of a low-risk, high-quality credit," state Division of Budget spokesman Matthew Anderson said in an e-mail.

The state estimates it will save $50 million by investing in TFA's BABs instead of Treasuries. The lottery fund currently has $1.5 billion of Treasuries, at market value, to fund annuity payouts to lottery winners. The state is expected to hold the bonds in a long-term structured portfolio to pay certain obligations of the lottery, according to a press release.

The spread between 30-year Treasuries and the Wells Fargo Build America Bond index, which tracks most BABs issued to date, was 147 basis points yesterday.

A.C. Advisory Inc. and Public Resources Advisory Group are financial advisers on the deal. Sidley Austin LLP is bond counsel.

Further details on the VRDBs will be announced closer to the sale, Anders said.

The TFA has sold $9.61 billion of new-money future tax-secured bonds and $6.74 billion of refunding future tax-secured bonds since 2000, according to Thomson Reuters.

The recession has taken a bite out of the city's personal income tax collections but to date its rating hasn't been affected.

"There has been substantial decline in the personal income tax revenue for the city," said Standard & Poor's analyst Robin Prunty. "Even with that decline through fiscal 2009 and what the forecast is for 2010, there's still extremely strong debt-service coverage."

Despite volatility in personal income tax revenue, debt-service coverage is expected to be 9.7 times in the current fiscal year, an increase over the 7.5 times coverage in fiscal 2009.

Standard & Poor's rates TFA's senior and subordinate debt AAA.

Fitch Ratings assigns a AA-plus to outstanding TFA bonds. Moody's Investors Service rates them Aa2. All of the outlooks are stable.

The city, which has $14.07 billion of TFA bonds outstanding, sells TFA future tax-secured bonds for its ongoing capital program.

Mayor Michael Bloomberg proposed a preliminary $63.6 billion fiscal 2011 budget last month. The City Council begins budget hearings on March 4. In the next fiscal year, the city plans to sell $3.1 billion of general obligation bonds and $3.1 billion of TFA future tax-secured bonds to finance capital projects, according to its January financial plan.

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