Deal in Focus

Boston Sets $181.5 Million Sale

Boston Wednesday will sell $181.5 million of new-money and refunding general obligation debt via competitive bid, including $41.6 million of taxable qualified school construction bonds.

Boston tends to hold its annual competitive bond sale in February or March. This week’s transaction includes $86.3 million of Series 2011A new-money bonds that will help finance infrastructure projects.

Another $38.9 million of Series 2011B bonds will advance refund outstanding special obligation convention center debt and turn those bonds into GOs.

The deal also includes $41.6 million of Series 2011C QSCBs and $14.6 million of Series 2011D bonds that will current refund outstanding GO debt for present-value savings.

Officials do not anticipate using term bonds in the transaction. The Series 2011A new-money bonds offer serial ­maturities from 2012 through 2031, according to the ­preliminary ­official statement. The Series 2011B refunding bonds will have serial maturities from 2012 through 2027. The QSCBs will mature annually from 2017 through 2026 and the Series 2011D refunding bonds will offer serial maturities from 2013 through 2016, the POS said.

Last year, the city received 12 bids on its $155.9 million new-money and refunding sale that priced in March 2010, according to Vivian Leo, Boston’s temporary collector-treasurer.

The transaction included taxable Build America Bonds and recovery zone economic development bonds.

Nearly $40 million of Series 2010A tax-exempt bonds priced with yields ranging from 0.38% with a 2% coupon in 2011 to a 3.88% yield with a 3.75% coupon in 2030, according to the official statement.

Boston carries a triple-A rating from Moody’s Investors Service and AA-plus ratings from Standard & Poor’s and Fitch Ratings.

Market participants said the sale should perform well, as the overall volume of new-money issuance is light and the city has a strong credit.

“I think the city is timing it well and they should see a sizeable amount of demand,” said Michael Pietronico, chief executive officer at Miller Tabak Asset Management.

While Boston is set to issue on Wednesday, New York State decided to postpone its plan to take bids for $804 million of new-money and refunding GO bonds this week until the week of March 21.

Boston’s new-money proceeds will help finance a new police station in the Roxbury neighborhood, upgrades of the city’s 38 community centers, public pool rehabilitations, renovation of the East Boston Stadium, road and sidewalk upgrades, and other capital projects.

The Series 2011B refunding bonds will help refinance a portion of the city’s $93.5 million of outstanding special ­obligation convention center bonds into GO debt. The special obligation bonds are paid off with hotel room taxes. ­Officials will use existing hotel tax revenue to pay down the remaining bonds.

Leo and her team anticipate the city will receive $5.9 million of savings from the advance refunding, with a net present-value savings of 6.3%.

Fitch rates the convention center bonds AA-minus. Moody’s and Standard & Poor’s rate the special obligation bonds Aa3 and A-plus, respectively.

The Series 2011D bonds will current refund outstanding GO debt. Officials anticipate that refinancing will generate $1.2 million of savings with a net present-value of 8.3%.

Boston had $891.9 million of outstanding GO debt as of March 1, 2011, according to the POS. It has no variable-rate debt and no derivatives.

“We considered variable-rate debt a few years ago, but interest rates have been so low, so it really has not been beneficial for us to do that,” Leo said. “If you look at the last six to seven years, the interest rates that we’ve received are very low.”

Officials do not anticipate returning to the market again this year. They ­anticipate spending $1.5 billion during the next five years for infrastructure needs.

Borrowing will increase slightly, with the city issuing $100 million to $120 million of new-money bonds annually, according to Meredith Weenick, Boston’s acting director of administration and finance.

“We look at what our operating costs are and try to balance all the needs of the city into a debt service that we can afford,” Weenick said. “So our budget in recent years has not grown tremendously and we have to live within our means.”

Rating analysts and market participants point to the city’s strong fiscal management during the recession as a credit strength, along with its conservative debt portfolio.

Fiscal challenges include a $1.3 billion unfunded pension liability and $4.7 billion of unfunded other post-employment benefits obligations.

Weenick said the OPEB liability was $1 billion larger last year before the City Council implemented a plan to require retirees that are Medicare eligible to enroll in that program.

Boston has two funds that total a combined $100 million to help pay down its OPEB obligation.

In addition, the city last year adopted a schedule that would fully fund its pension fund by 2025.

Guy LeBas, chief fixed-income ­strategist at Janney Montgomery Scott, said that while investors look at a ­municipality’s long-term obligations to its employees, Boston’s prudent ­financial history will help it in the market.

“I think it is significant with Boston since they do have a higher pension and OPEB expense than many other large cities, even,” LeBas said. “At the same time, if you take a look at the experience of the last several years, they’ve had very conservative management through a fairly severe downturn. And I think that success over the last several years trumps the long-term risk.”



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