New York City Set to Kick Off First GO Sale of 2011 for Debt Savings

New York City this week will issue its first general obligation bond deal of 2011 with a $641 million refinancing to generate debt-service savings.

The fiscal 2011 Series I GO transaction includes $400 million of tax-exempt Series I-1 bonds that will refund fixed-rate debt for present-value savings. Another $241.4 million of taxable Series I-2 and I-3 bonds will refinance variable-rate debt.

The bonds will remain in floating-rate mode but the refinancing will cut the maturity schedule by three years.

The overall transaction offers serial maturities from 2011 through 2023 and two term bonds, according to the preliminary official statement.

Within that framework, $56.4 million of taxable Series I-2 bonds will mature on Aug. 1 and $185 million of taxable Series I-3 bonds will mature annually from 2012 through 2016.

In addition, the city will convert $50 million of tax-exempt fiscal 1994 Series H-4 bonds into fixed-rate mode from a variable weekly-rate mode. The bonds mature in 2014 and 2015.

The conversion will allow the city to use a letter-of-credit facility attached to the variable-rate debt on future new-money, floating-rate issuance rather than keeping that liquidity enhancement on the 1994H-4 bonds.

Bank of America Merrill Lynch began a two-day retail pricing period Friday for the tax-exempt bonds.

The bonds mature in 2011 and from 2014 through 2020, with yields ranging from 1.60% with a 2% coupon in 2014 to 3.35% with a 5% coupon in 2020.

Pricing will open up to institutional investors on Tuesday.

New York City will issue the taxable portion via competitive bid, also set for Tuesday.

Sidley Austin LLP is bond counsel. Public Resources Advisory Group and A.C. Advisory Inc. are financial advisers on the offering.

City officials are looking to take advantage of a quieter borrowing period to help grab investor interest.

“I think the biggest factor that we’ve seen is that supply has been very low and the forward calendar is not big, and I think that’s helped the market firm up,” said Carol Kostik, deputy comptroller for public finance. “We also haven’t done a GO deal yet this year and we have a good following for those bonds. So we hope that folks will be attracted into our transaction.”

Deputy budget director Alan Anders said the city does not anticipate holding an investor conference call because Mayor Michael Bloomberg last month released his fiscal 2012 budget proposal, which includes the city’s most up-to-date revenue forecasts and spending plans.

Anders expects the refinancing will attract a mix of municipal bond investors.

“We usually a get broad cross-section, but I don’t have any particular expectations on this deal that are different from others,” he said.

Fitch Ratings and Standard & Poor’s rate the fiscal 2011 Series I bonds AA,while Moody’s Investors Service rates the bonds an equivalent Aa2. New York City had $41.56 billion of outstanding GO debt as of June 30.

Investors noted that Wall Street’s recovery since 2008 helps the city’s coffers and is a credit-positive.

“I would think that relative to the rest of the market this deal should do very well,” said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. “There’s been a dearth of New York supply overall and the city is seeing its spreads hold up very well in the secondary market.”

While the city has a broad and diverse economic base and is an international commercial center, there is an “above-average reliance” on the financial services industry for personal income and city tax revenue, according to Standard & Poor’s.

The rating agencies point to the city’s strong budget management that has addressed deficits quickly and incorporates conservative revenue estimates.

The city also has high debt levels. Long-term obligations include pension and other post-employment benefit liabilities of $625.4 million and $75 billion, respectively, as of June 30, according to the POS.

The city implemented a trust to help address its growing OPEB liability, which has a fund balance of about $2 billion.

In addition, city officials are working on pension-reform measures that could generate $1 billion of savings by fiscal 2019, according to Fitch.

“Pension expenses have increased significantly and are expected to place an even larger demand on the budget in coming years,” the agency said in a Fitch report.

John Mousseau, portfolio manager at Cumberland Advisors, said that he looks at state and municipal pension and OPEB obligations, including New York City’s, but noted that issuers are taking steps to deal with those growing liabilities.

“Like anything else your concern is some of the longer-term obligations like pensions and OPEBs,” he said. “Like state levels elsewhere, those are concerns that are getting addressed and those are long-term concerns as opposed to current deficit concerns.”

For this refinancing, city officials decided to pick a senior manager for the deal by competitive selection rather than rotating the assignment.

The city invited all 14 investment firms that are qualified to serve as senior manager on New York City debt to submit proposals for the refinancing.

Officials also used a competitive solicitation process in a GO refunding sale that priced last year.

Kostik said that Bank of America Merrill’s strategy offered the greatest budget savings and present-value savings.

“I don’t think this is how we will be doing all of our refundings going forward by any means, but it’s been a chance to give people a reward who have invested in the infrastructure and know-how to run New York City deals,” she said.

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