The New York Municipal Bond Bank Agency plans to market a pooled bond financing on behalf of six municipalities next month — the second such deal from the issuer in recent months.
The MBBA board last week approved the issuance of up to $150 million of bonds. The final deal size is expected to be smaller, about $118 million, composed of $78 million of tax-exempt bonds, $32 million of taxable Build America Bonds, and $7 million of taxable recovery zone economic development bonds.
The agency sold its first bonds under a program enacted by the state last year in December when it issued $184.2 million on behalf of a city, a town, and four counties. The idea was to give municipalities wishing to take advantage of new bond programs created under the American Recovery and Reinvestment Act of 2009 an option other than going it alone.
Jefferies & Co. will lead manage. Orrick, Herrington & Sutcliffe LLP is bond counsel.
Subject to market conditions, the deal is expected to price the first week of May with a one-day retail order period.
The bond will have maturities out to 25 years and will be sold on behalf of the city of Ithaca and five counties: Allegany, Broome, Madison, Oneida, and Sullivan.
Municipalities that enter into the pooled financing sell general obligation bonds and assign their allocation of recovery zone bonds to the bond bank. Those bonds, called "local ARRA bonds," are the security for the MBBA-issued bonds. The agency bonds are issued in multiple series that group issuers that have the same credit. If the municipality fails to make payments, the comptroller's office can intercept state aid to make bond payments. The issuer collects the subsidies and passes them on to the municipalities.
Only a handful of municipalities in the state have gone out on their own using bond programs created under ARRA: New York City, Oneida County, Nassau County, and Westchester County. Aside from the bond bank deal, the state's only other recovery zone sale in the state was for Oneida.
Many counties have small allocations of recovery zone bonds — called "super-BABs" because they offer a 45% interest subsidy, compared to 35% for BABs — and most municipalities are required by the state to sell bonds competitively.
"Every issuer in our analysis achieved savings," George Graham, bond bank senior vice president for debt issuance, said of the December deal. "There's no way to do an exact comparison but it's our feeling that they did achieve lower interest costs by going through the pool."
Savings ranged from 14 to 26 basis points, depending on maturities and ratings of the different issuers, he said.
The pooled offering was also intended to attract more investors than might look at a small county deal and thus achieve better rates.
"You might not attract the attention of the bidder if [for example] Genesee County goes out with a $1 million recovery zone bond and Warren and Washington [counties] go out with $500,000 each, but if you go in and you're pooling a dozen, two dozen jurisdictions, and now you've got a $25 million or $50 million offering, you're going to get attention from investors," said Richard Tortora, president of Capital Markets Advisors LLC.
"Because it's a new product and a lot of the allocations were quite small, it does make sense to go into a pooled financing, capture the economies of scale by having one official statement, one banker going out there or a team of bankers and selling this in the market place," he said.
Despite the reported savings, some issuers have expressed skepticism about the pooled structure.
Sullivan County may sell up to $13.6 million of bonds through the bond bank, and county Treasurer Ira Cohen is still evaluating whether the pool is a better deal for the county.
"Some people think this MBBA pool is going to be a bargain, so to speak. I don't think so," Cohen said. "We've always done well with our bond sales."
Cohen said that the benefit of taxable BABs tends to be in the longer end but that much of the county's debt will have maturities of 15 years or less.
"One of the selling points is that on the taxable bonds, the federal reimbursement will give you good rates but it's turned out that they don't really kick in unless you're doing some long-term bonding," Cohen said. "You really have to go 15-30 years to take advantage of the savings on the taxable bonds."
In New York, municipalities have to structure their bonds so that the maturities don't exceed the period of probable usefulness of the project being financed. Rochester, which sold $98 million in the December deal, tends to speed up its amortization so that most debt isn't longer than 15 years.
"We didn't have a lot of stuff that would have hit the BABs range anyhow," said Brian Roulin, Rochester's director of finance. "I think it would have been comparative on our own."
Charlene Kagel, deputy finance commissioner of the Long Island town of Brookhaven, was pleased with the December deal when they raised $42.2 million through the pooled financing.
"I'm sure on the tax-exempt portion we probably would have fared pretty well because we usually do," Kagel said. "But pooling the BABs and the recovery zone bonds ... we probably realized some savings there."
There are costs of issuance selling through the pool, since the bond bank requires issuers to pay an up-front fee and an annual fee. Graham said the up-front fee is expected to be 50 cents a bond and the annual fee is expected to be 11 basis points on outstanding principal. The fee pays for the bank's administrative costs, which includes collecting the BAB and recovery zone bond subsidies from the Treasury Department, and they also cover trustee costs. The savings cited for the borrowers factors in the fee, Graham said.
"I'm going into this assuming some of our fees will be higher than if we didn't go through the bond bank agency, but it's supposed to even out in the long run with some of the savings," Cohen said. "Borrowing is going to be pretty much the same for us whether we do it through the bond bank agency or not."
Sullivan will make a final decision whether to participate in the pooled deal after seeing final cost projections this week or next, Cohen said.
The deal didn't work exactly as planned last time. The tax-exempt portion was increased to $157.4 million from the $120 million anticipated in the preliminary official statement and the BABs were decreased to $18.3 million from $60.5 million. The recovery zone portion, $8.9 million, was roughly what had been anticipated. Jefferies also ended up taking some of the bonds on its books.
"The tax-exempt market got a lot stronger just before we went in to the marketplace relative to the taxable market, which meant it was more efficient — produced a lower cost — to move some of those maturities from BABs into tax-exempts," Graham said.
The bond bank is an infrequent issuer, selling $753.3 million of new-money bonds in three deals since 2000, according to Thomson Reuters.
