A decision more than a year ago to invest in financial modeling that addresses New York’s complicated finance laws paid off for Loop Capital Markets Inc.
New York City closes a $963 million general obligation refunding today that was the first in recent history to use a minority-owned firm to run the numbers. The deal was also a departure from the city’s typical refunding procedure in that it used a mini-request for proposals. The result was that the city reached outside its top underwriting tier to select Barclays Capital and Loop to lead manage the deal. Barclays managed the order book and marketing effort while Loop’s primary responsibility was to structure the deal.
Loop chairman and chief executive officer James Reynolds Jr. said when he hired former Merrill Lynch banker Michael Jang more than a year ago, he wanted him to build from scratch a financing model to go after the city’s business.
“His main function, his main goal, was going to be to understand local finance laws and understand everything about New York City finance and to build a model that would allow us to have a refunding capability that was second to no firm’s,” Reynolds said. “The model is the most sophisticated model that we have ever developed inside of our firm.”
New York’s local finance laws and the city’s large amount of tax-supported debt — about $62.65 billion — make refundings complicated.
Under state local finance law, municipalities cannot issue debt with maturities that exceed the period of probable usefulness — or PPU — for the assets they finance. The law is meant to ensure that municipalities are not paying off debt on assets that are no longer usable. The city maintains a database called the Debt Management System that matches thousands of PPUs to the debt that financed them.
Another wrinkle is that deals must also include a maturity for every year from one year up to the final maturity. This can be achieved by issuing serial bonds or term bonds with sinking funds.
The challenge for underwriters on refundings is to sift through massive amounts of data and find savings while complying with the law.
Refundings are “more cumbersome for New York City than for anybody else you would do a refunding for,” an industry source said. “You can’t just use the regular model people use. You’ve got to have a specialized model for New York City.”
The city issued the RFP on June 28 to its senior managers and special bracket firms with a five-day deadline. City refundings have meet a 3% present-value savings threshold. Loop’s and Barclays’ proposals had expected savings of $62 million, or 6.9% on what was originally meant to be an $800 million deal, Scott Sieber, spokesman for New York City’s comptroller, said in an e-mail.
The comptroller’s office wouldn’t specify by what criteria they choose Loop’s structure or why it stood out, other than its high score using generic guidelines.
“It was essentially a competitive bake-off as opposed to just going to the next one in line,” said Comptroller John Liu. “Every so often you’ve got to have some competition to ensure that our taxpayers are getting the best rates.”
The comptroller’s office said that favorable market conditions at the time of pricing on July 27 led the city to upsize the transaction to the $963 million that was sold and generate expected savings of approximately $84 million, or 7.7%. The refunding had maturities from one to 13 years.
Reynolds said the mini-RFP process, which is used in some other states but not commonly in New York, leveled the playing field for firms vying for the refunding.
“The only way you could win it was to have the knowledge, put in the time, and do the work to come up with the best idea,” he said.
New York City has sold $12.68 billion of GO refunding bonds and $7.14 billion of TFA refunding bonds since 2000, according to Thomson Reuters.
Liu said the city would look at the competitive mini-RFP process for future refundings on a case-by-case basis.
