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Deal in Focus

Denver Latest to Join BAB Parade

DALLAS — Boasting a top credit rating, Denver anticipates a strong response to next week’s $350 million deal that will include the city’s first Build America Bonds.

The general obligation bonds, approved by voters in 2007 as part of the $550 million Better Denver program, will sell competitively June 9, with ­Piper ­Jaffray & Co. as financial ­adviser.

“We usually do competitive sales for our GO deals unless there’s concern about market disruptions or volatility, or we’re at the end of an authorization with specific funding targets to hit or ballot constraints we need to stay within,” said Denver debt administrator Margaret Danuser.

The city sold its first bonds from the Better Denver program last year along with an earlier authorization for the Denver Zoo. Danuser said the city was pleased with the rates it earned on the deal, which included a refunding piece.

For a triple-A credit, the market could be even more inviting this year as the economy appears headed toward recovery.

“We think we’re getting into the market at a good time,” Danuser said. “Interest rates are low, supply is manageable, cash is available with upcoming coupon payments, and munis are cheap to the rest of the market.”

Although the deal represents the first BABs from the city and county of Denver, Denver International Airport offered $65 million of the taxable debt last October, with the bonds selling quickly.

“The size of this deal should garner interest from larger institutional investors looking for index-eligible bonds as well as smaller retail-oriented investors,” Danuser said. “I get calls all the time from local investors asking when the city will be in the market again.”

A $35 million portion will be double tax-exempt under Colorado law, with the balance being taxable BABs.

The deal comes as some issuers are voicing concern about direct interest-rate subsidies for BABs being withheld for disputes over payroll taxes and other issues.

The so-called offsets are generally small, but Austin learned recently that a direct subsidy of $617,000 for a $79 million issue last October had been withheld.

Maryland has had a BAB subsidy reduced so that it could pay the federal government outstanding payroll taxes, and Florida halted its BAB issuance in March over withholding concerns.

Also, the Internal Revenue Service said last week that it plans to audit one of every two BAB transactions to track primary-market trading and pricing.

Ben Watkins, Florida’s bond finance director, said the audits should make issuers reconsider issuing the new taxable debt.

“These are risks that issuers need to consider and evaluate before embracing BABs as a tool,” Watkins said last week.

Danuser said Denver is aware of the issues going into next week’s offering.

“We’ve spent quite a bit of time making sure we have compliance procedures in place related to the BABs requirements,” she said. “We’ve also researched our exposure to the offset issues facing other issuers but don’t anticipate running into any of these types of problems.”

Denver’s triple-A has been affirmed by Fitch Ratings, but officials are awaiting reports from Moody’s Investors Service and Standard & Poor’s. The two agencies rated the city and county at triple-A last year.

“Financial performance in fiscal 2009 was a departure from previously strong results, with reserves used to partially offset a significant sales tax decline in 2009,” Fitch analyst Jose Acosta noted. “As a result, reserves now fall below the city’s 15% fund-balance policy level but above its 10% floor. The city expects to rebuild its unreserved fund balance over the next several years.”

Going into this issue, Denver has $616.2 million of unlimited-tax bonds outstanding and $278.5 million of certificates of participation. The COPs are rated one notch below triple-A on the Fitch scale.

The 2010 bonds will be used to repay commercial paper draws and fund new construction and improvements.

Notable bond projects include rehabilitation and restoration work on the Civic Center Park’s Greek amphitheater and the Voorhies Memorial.

Civic Center Park, a mall that links the gold-domed state capitol building and the City and County Building, is a neoclassic landmark in the heart of Denver featuring statuary and gardens.

First proposed by Mayor Robert W. Speer in 1904, Civic Center was based on ideas shown to him at the 1893 World’s Columbian Exposition in Chicago.

The theme that was influencing American urban architects was called “City Beautiful.” The park opened in 1919 after Speer spent years pushing the idea.

The Voorhies Memorial seal pond was added in 1922 in honor of banker John E. Voorhies, who made his wealth from mining. The pond and fountain featuring sculptures of children riding the backs of seals is bordered by a colonnade and was modeled after the Water Gateway at the Columbian Exhibition.

Other projects covered by the bonds include construction of new greenhouses at the Denver Botanic Gardens, land purchase and construction of new municipal animal shelter, a new police crime lab, street and bridge construction, and library construction and improvement.

The bond projects come as Denver appears to be gradually recovering from the recession that made 2009 a tough year for state and local government.

“The breadth and scope of the recessionary effects on Denver’s economy was greater than the city’s management originally anticipated as evidenced by numerous downward revisions to the budget forecasts for city’s largest revenue source, sales and use taxes,” Fitch’s Acosta observed.

“This revenue stream comprises 50% of general fund revenues. In response to a steep 10% decline in fiscal 2009 in sales and use tax revenues, the city reduced its budget by a large $76 million, equal to almost 9% of total spending,” he wrote in the rating report.

Although Denver’s population is 610,345, it is the hub of a 10-county metro area of more than 2.5 million people. Landlocked by suburbs, the city is restricted from annexing any new territory by state law but was granted an exemption for construction of Denver International Airport, which opened in 1995.

Next year, voters are expected to decide whether to increase sales taxes for the Regional Transportation District to complete a FasTracks transit system by 2017. One of the planned rail corridors would link DIA to the landmark Union Station in Denver’s trendy Lower Downtown area.

Unlike some cities in the Southwest, Denver has had success in maintaining a viable downtown with residential, academic and entertainment sites serving a diverse population.

Projects in the Better Denver program were culled by a task force appointed by Denver Mayor John Hickenlooper, who is now running for Colorado governor as a Democrat.

The $120 million in remaining bond authorization will be issued over the next three to four years, officials said.

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