Deal in Focus

Big New York City Offerings On Tap

New York City is in the market this week with two bond deals that when completed will total $1.26 billion of taxable and tax-exempt debt.

The city ultimately will bring $900 million of general obligation bonds, with $750 million coming to market on Thursday. Also this week, the New York City Municipal Water Finance Authority is marketing $360 million of tax-exempt refunding bonds on Tuesday with a retail order period beginning today.

The GO deal has four components: $75 million of federally taxable bonds and $15 million of fixed-rate tax-exempt bonds on the short end and $660 million of taxable Build America Bonds covering the mid to long ­maturities. Another $150 million of tax-exempt variable-rate demand bonds are expected to go out to 30 years. They will be sold March 30.

Siebert Brandford Shank & Co. is book running-senior manager on the BABs and fixed-rate tax-exempts. The city will market the federally taxable bonds competitively. Barclays Capital will serve as remarketing agent on the VRDBs. Barclays Bank PLC will provide a standby bond purchase agreement on the variable-rate debt.

With the city and the water authority marketing $1.11 billion of bonds this week and New York State’s Metropolitan Transportation Authority also marketing a $500 million deal, the market will be awash in Empire State paper.

“The market can definitely absorb it,” said Evan Rourke, portfolio manager at Eaton Vance. “There’s cash in the muni market at this moment. There’s certainly an interest on both the BABs and tax-exempt versions of these.”

“We always put the BABs basically at the back end,” said New York City deputy budget director Alan Anders, referring to the structure of the GO deal. “BABs tend not to be cost-effective for the first five or 10 years, depending on what week it is.”

With this deal, though, the longest maturities will be occupied by variable-rate debt. The Securities Industry and Financial Markets Association municipal swap index, a commonly used benchmark for variable-rate debt, has been hovering around historic lows since the beginning of the year and hit 0.17% on March 3.

“It’s true that BAB savings are maximized at the long end but tax-exempt VRDBs at these rates under 1% are even better, so we put them at the very back,” Anders said. The difficulty in obtaining liquidity has prevented many issuers from taking advantage of the low variable rates, but there are signs of a thaw.

“We are seeing interest from banks now where for a while nobody saw interest from banks,” he said. “They’re getting more active but they’re also being selective.”

The city sells debt to support its ongoing capital program as GOs or as New York City Transitional Finance Authority future tax-secured bonds. Sidley Austin LLP is bond counsel. Public Resources Advisory Group and A.C. Advisory Inc. are co-financial advisers.

The deal comes as the city waits to see how it will fare in the state budget, which is due on April 1. Gov. David Paterson’s fiscal 2011 executive budget proposal cuts at least $750 million of aid to the city — city and state officials don’t agree what the actual size of the cuts are.

Mayor Michael Bloomberg’s preliminary budget for the city’s fiscal year, which begins on July 1, didn’t include Paterson’s cuts. Instead, Bloomberg said the cuts would cost the city the equivalent of 19,000 jobs.

The city is in better fiscal shape than the state, and the economic downturn has been less severe than in the nation, but it has  still been painful. The city has lost nearly 162,000 jobs, a 4.2% decline, and tax revenue in fiscal 2009 fell by $2.8 billion, a 7.1% decline — the steepest in at least 30 years, according to the state comptroller’s office.

The federal bank bailout helped preserve jobs on Wall Street, which saw record profits of $49.7 billion in the first three quarters of 2009 and could exceed $55 billion for the full year, the comptroller’s office reported.

Last year, the city forecast the recession would cost Wall Street 47,000 jobs, but to date only 27,000 have been lost and January projections put the figure at 33,000.

“The city has been doing a good job of making the types of incremental changes to adjust to lower revenues,” said Moody’s Investors Service analyst Nicholas Samuels. “That’s been reflected in both conservative revenue forecasting and also in actions to reduce expenditures, and also things like the sales tax increase last year that have helped its bottom line.”

Another factor helping the city is the phasing in of property tax assessments.

“Changes in assessed values are phased in over a five-year period and that has really helped pull the city’s revenues through this period,” Samuels said. “You still see property-tax increases through the period when the other — what the city terms the economically sensitive taxes — are decreasing because they are still realizing the assessments of the boom in the real estate market here.”

One unknown variable affecting both the city and state’s bottom line is the impact of changes to how Wall Street pays out bonuses. Cash bonuses paid to securities professionals for 2009 are projected to reach $20.3 billion, a 17% increase over 2008, the comptroller’s office saud.

While cash bonuses rose, many firms are giving more bonuses out in stock or other forms of deferred compensation in response to a populist backlash against investment banks. Samuels said it is too soon to tell what the new bonus structures will mean to long-term tax receipts.

Moody’s rates the city’s outstanding GOs Aa3 with a stable outlook. Standard & Poor’s rates the city AA with stable outlook and Fitch Ratings rates it AA-minus with stable outlook.

The real estate bubble led to a construction boom that sharply contracted last year. Construction spending in the city fell to about $25 billion last year from a high of $34 billion in 2008, according to Richard Anderson, president of the New York Building Congress, a trade group representing the construction industry.

About 60% of construction spending in the city is now publicly funded compared to about 45% in 2008, he said, while the city’s capital spending accounts for about 40% of publicly funded construction.

New York City’s capital spending, along with projects financed by the MTA, the Port Authority of New York and New Jersey, the Dormitory Authority of the State of New York and state transportation projects are “absolutely keeping the construction industry alive,” Anderson said.

“If we didn’t have city and state government agency spending at the level they are, this industry would be in a depression,” he said. Anderson said that when employment recovers in the city, construction spending will grow again too.

The final structure of the water authority deal had not been determined last week.

M.R. Beal & Co. is book-running senior manager. Orrick, Herrington & Sutcliffe LLP is bond counsel. Lamont Financial Services Corp. and MFR Securities Inc. are financial advisers on the deal.

Last week the issuer sold $500 million of taxable BABs as 32-year term bonds in two tranches. A tranche with a make whole provision priced at 6.011%, 131 basis points above 30-year Treasuries while a tranche with a 10-year call provision priced at 6.491%, 179 basis points above 30-year Treasuries.

 The authority finances the city’s water and sewer capital program, including projects mandated by the state and federal governments, projected to total $14.17 billion from fiscal 2010 through fiscal 2019. The authority expects to sell, on average, $1.9 billion of new-money bonds annually through fiscal 2014, the POS said.

The system supplies water to nine million people in New York City and surrounding areas. Water usage fees, which back the bonds, are established by the city’s water board, which is separate from the authority board. The board has covenanted to establish rates that will be at least equal to 115% of debt service on first resolution bonds and 100% of all other operational costs, including debt service on second resolution bonds. This week’s bonds are second resolution bonds.

The capital program has required large rate increases in recent years that have become a political issue. The board has authorized double-digit rate increases the past three years in a row and projects it will raise rates by 14.3% in fiscal 2011, according to the POS.

Moody’s rates the deal Aa3, Fitch rates it AA, and Standard & Poor’s rates it AA-plus. All three agencies assign it a stable outlook.



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