The New York City Transitional Finance Authority plans to market its first qualified school construction bonds tomorrow as part of a $1.39 billion deal that began taking retail orders on Friday.
The issue includes $250 million of taxable QSCBs that will be marketed with a single bullet maturity of 16 or 17 years.
Despite getting a $699 million allocation of QSCBs from the U.S. Treasury Department last year, the city waited to issue the bonds because it felt the market had not developed as envisioned when the new class of tax-credit bonds were created last year under the American Recovery and Reinvestment Act.
Under a bill signed by President Obama in March, the program was changed so issuers could take a direct subsidy from the Treasury on the bonds instead of the tax-credit to investors, making them similar to Build America Bonds but with a subsidy roughly equivalent to interest costs.
“It absolutely paid off to wait,” said New York City deputy budget director Alan Anders. “The tax-credit bonds didn’t receive good receptivity in the marketplace ... and we knew if Congress approved 'QSCB BABs,’ they would sell well.”
The deal also includes BABs, traditional taxable bonds, tax-exempt fixed-rate bonds and a variable-rate piece. Two sub-series of bonds will be priced competitively. The bonds are secured by a subordinate lien on the city’s personal income tax and sales revenues. Sub-series G-2, $78 million of taxable BABs, will be sold directly to the state, which will hold them in an investment portfolio used to pay state lottery certain obligations. Two traditional taxable sub-series will be priced competitively: the $70 million subseries G-4 and $20 million subseries I-1.
Bank of America Merrill Lynch is book-running senior manager on negotiated portion the deal. Sidley Austin LLP is bond counsel, and Public Resources Advisory Group and A.C. Advisory Inc. are co-financial advisers.
New York City deputy comptroller for public finance Carol Kostik said the QSCB investors should be the same ones buying BABs.
“The BABs and QSCB taxable pieces we think should be going to the same type of buyer base, which is the people who are interested in taxable municipals,” she said. “The QSCBs should be looked at exactly like a BAB. The buyers are getting a taxable coupon at a market rate, and whether the subsidy is a BAB subsidy or a QSCB subsidy, we think should be irrelevant to them.”
In January, city officials raised a concern that state finance laws requiring an amortization schedule with level or declining debt service would prevent the use of a invested sinking fund on the deal. City attorneys and bond counsel concluded that the law allowed the TFA to use one, Anders and Kostik said.
“Anything we can earn is a net benefit to us so it makes sense rather than to have serial bonds to have a single term and to put the money aside and invest it along the way,” Anders said.
The city received a $664 million allocation of QSCBs for 2010 — the largest allocation for a municipality from the $11 billion total national allocation.
The city has sold $16.71 billion of TFA future-tax-secured bonds since 2000, according to Thomson Reuters. The TFA has $6 billion of senior bonds and $6.5 billion of subordinate bonds outstanding.
Moody’s Investors Service rates the bonds Aa1 with a stable outlook, citing high debt service coverage and a strong legal structure insulating the credit from “potential city fiscal stress.” Based on 2009 collections, the revenue provides 7.5 times debt service coverage. Revenues are projected to increase by 3.3% in the current fiscal year, Moody’s said in a rating report.
Challenges include the cyclical nature of personal income in light of the volatile nature of the city’s financial services industry and the state’s right to alter or repeal the taxes securing the bonds. Fitch Ratings and Standard & Poor’s rate the bonds AAA with stable outlooks.
