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Triple-A Columbus Sells Despite Federal Uncertainty

JUL 26, 2011 8:20pm ET
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CHICAGO — The top-rated city of Columbus, Ohio, will enter the market Wednesday with $289.4 million of bonds, marking the city’s annual outing to finance capital projects. Some of the proceeds also will be used for improvements to a site for a new casino.

Retail investors snapped up a chunk of the issue offered Tuesday, and the city is opening the deal to institutional buyers Wednesday.

The deal comes as Columbus — like other triple-A rated local governments around the country — braces for the possibility that Moody’s Investors Service will put  its ratings on review for downgrade due to concerns that the U.S. government could lose its triple-A credit rating.

Moody’s affirmed Columbus’ Aaa rating last week, but noted in the report that any additional credit actions could be announced this week as part of a review of all triple-A rated local government issuers.

The rating agency on July 13 warned that the United States could be downgraded if it defaults due to a failure to raise the debt ceiling. Analysts also warned that the downgrade could trigger action on triple-A rated municipal credits, depending on how vulnerable they are to problems with the U.S. sovereign credit.

For example, municipal issuers whose economies or budgets would be badly hit by federal spending reductions or layoffs could be susceptible to a downgrade.

Issuers with advance refunded bonds — like Columbus — would see that debt downgraded simultaneously with a downgrade of U.S. debt. Debt service on advance refunded bonds typically is paid from an escrow account funded with Treasury securities.

Last week, Moody’s put on review for possible downgrade five of the 15 triple-A rated states due to their relatively high level of reliance on funding from the federal government. The rating agency said it would spend the weeks of July 18 and July 25 reviewing local governments.

Columbus officials opted to hit the market despite the uncertainty and have spent the last two weeks meeting with bond counsel and financial advisers to determine any potential fallout from the deal’s timing in light of the debate over raising the U.S. debt ceiling.

The finance team decided to move the discussion of a possible impact of a U.S. downgrade and default to the top of bond offering documents from an appendix, and highlighted the city’s confidence that it would escape a downgrade with the exception of its advance refunded, or defeased, bonds.

“While the effect of any downgrade of U.S. debt cannot be predicted with certainty at this time, it is the opinion of the city auditor that, apart from defeased debt of the city, which would be expected to move in lockstep with any changes in the rating of U.S. debt, any downgrade of U.S. debt should not result in a downgrade of the city’s debt,” Columbus auditor Hugh Dorrian said in the preliminary offering statement.

City officials are optimistic that credit analysts will determine that Columbus is one of the more resilient triple-A credits, according to assistant auditor Megan Kilgore.

She noted that none of the city’s bonds are backed by federal grants or subsidies and that federal employees make up less than 1% of its workforce.

“We’ve been educating ourselves the best we can about what Moody’s and the other rating agencies are doing,” Kilgore said. “We really are optimistic that the city will not be considered vulnerable.”

Aside from the turmoil surrounding the nation’s credit, Kilgore said the municipal market’s recent light supply of high-credit paper bodes well for the city’s borrowing.

“I rarely get as many phone calls from investors as I’ve gotten last week,” she said. “I think that folks are sitting on a lot of cash out there, and they’re looking to invest and there is not as much high-quality paper.”

The Columbus offering totals $289.5 million, divided between $176.1 million of new money and $113.4 million of bonds refunded for savings.

The transaction is divided into three series of general obligation debt: $198.4 million of unlimited-tax tax-exempt GOs, $74.4 million of limited-tax tax-exempt GOs, and $16.6 million of limited-tax taxable bonds.

As it has for its recent general obligation sales, the city tapped Stifel, Nicolaus & Co. as senior manager, with JPMorgan as co-manager and four additional firms rounding out the underwriting team. Bricker & Eckler LLP is bond counsel and Prism Municipal Advisors LLC is the city’s financial adviser.

The three series feature final maturities of 2029, 2027, and 2032. Currently 71% of the city’s debt matures within 10 years, Kilgore said.

All the debt carries Columbus’ full-faith-and-credit pledge. The city dedicates one-fourth of its 2.5% income tax to GO debt service.

Most of the proceeds from the new-money debt will be used to finance various capital projects, including parks and public safety.

Proceeds from part of the $16.4 million taxable tranche will finance infrastructure work to support a new $400 million casino set to open next year. The city might tap a new casino tax to pay off those bonds, according to bond documents.

The so-called host city tax equals 5% of gross casino revenues, with projected revenue of around $25 million a year. Columbus is one of four Ohio cities — along with Cincinnati, Cleveland, and Toledo — that won approval for new casinos under a ballot measure approved by voters in 2009. Columbus was the only city that opposed the new gambling facility.

The city in June reached an agreement to end a federal lawsuit that developers brought against Columbus and Franklin County for denying water and sewer services to the planned site.

The agreement, and companion legislation, annexes the casino site into the city’s west side. Franklin County commissioners still need to approve the deal.

Ahead of the sale, all three major rating agencies affirmed their triple-A ratings and stable outlooks on the state’s capital city.

Like most Ohio municipalities, ­Columbus is dependent on the sometimes-volatile income-tax revenue for most of its general fund. But Columbus’ leaders petitioned for and won an income-tax increase in 2009. The tax hike is expected to generate $120 million annually.

After the deal, Columbus will have $2.1 billion of outstanding bonds. In 2012, the city plans to issue $448 million of enterprise debt, which includes loans through the Ohio Water Development Authority to finance a major sewer renovation project, as well as $102 million of voter-approved GO debt, according to Standard & Poor’s.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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