Silverstein Properties Inc. anticipates a mixture of fixed-rate and variable-rate debt will grab lower all-in costs on an upcoming Liberty revenue bond deal to help finance construction of Tower 4 at the World Trade Center.
The New York Liberty Development Corp. will begin the first segment of the $1.28 billion transaction this week on behalf of Silverstein Properties. Goldman Sachs & Co. Wednesday or Thursday will price $900 million of fixed-rate Series 2011A Liberty revenue bonds. The fixed-rate deal will be followed by a $375 million variable-rate sale that will price before the closing of the fixed-rate debt.
Rental payments that Silverstein receives from the two main tenants of Tower 4 — the Port Authority of New York and New Jersey and New York City — will pay down the Liberty bonds, issued under a program the federal government created after the terrorist attacks of Sept. 11, 2001, to help finance the redevelopment of the World Trade Center and lower Manhattan. Tower 4 is rising at the site of a low-rise building destroyed by the collapse of the South Tower next door. Along with Tower 4, Silverstein is the developer of Towers 2 and 3.
Officials in December postponed what was then an all-fixed-rate deal after interest rates spiked. Larry Silverstein, president and chief executive officer of Silverstein Properties, is hopeful that the market will come through this time and offer an all-in interest rate cost in the 5% range.
The CEO spoke with reporters last week following a press conference with New York City Mayor Michael Bloomberg at 7 World Trade Center to announce a new tenant there. Silverstein told reporters that while he cannot predict the market, he anticipates he will be happy with the results of the fixed-rate and floating-rate transactions for Tower 4.
“As the result of an approach that we’re going to be taking at the end of this month, we are expecting to achieve the rates that we would have achieved just before the market turned upward,” Silverstein said. “So I think we’ll be very pleased with the net results.”
The Port Authority owns the land and building at Tower 4. The agency has leased the 63-story building to Silverstein for 90 years. Silverstein anticipates completing the Tower 4 development by December 2013 and workers have completed 20 floors of the building.
Tower 4 will have 1.8 million gross square feet of office space on 56 floors. Silverstein Properties needs to find tenants for about one-third of the space. The Port Authority will rent 600,766 square feet and New York City will rent 581,642 square feet.
Silverstein said that snagging the Port Authority and the city as tenants has helped finance construction of Tower 4, but that the building may not need New York City to occupy office space.
“The city made its commitment to us just [like] the Port Authority to provide for financing of the building of Tower 4; it was totally conceivable at the time,” Silverstein said during the press conference. “The city’s obligation may not prove to be necessary, but only time will tell. But it was done for financing purposes.”
The city will pay $32.8 million in rent for the first year of the lease, at $56.50 per square foot, according to the preliminary official statement The rental price per square foot will increase gradually every year.
The Series 2011A bonds will defease a portion of Liberty bonds sold in 2009. Those Series 2009A proceeds currently sit in escrow. They were sold and escrowed before authorization for the Liberty bond program expired at the end of 2009.
Since then, Silverstein and the Port Authority have settled legal and financing disputes and Tower 4 construction is underway. Now Silverstein needs to tap into the bond funds for construction costs. So far, insurance proceeds have been financing the development.
The municipal bond market this year has been challenged by outflows from muni funds as investors pull away from municipal debt. Marvin Markus, managing director of public-sector and infrastructure banking at Goldman, said the Liberty bond deal would need to address demand issues in any environment.
“Any deal has to be concerned with overall market dynamics, supply and demand dynamics,” Markus said in a telephone interview. “So it’s not any different than any deal that has a relatively long maturity.”
The Series 2011A bonds include $133.3 million of debt maturing in 2031, $411.5 million maturing in 2041, and $355 million maturing in 2047, the POS says.
Ratings for the bonds were not available by press time.
Market analysts said the Liberty bonds may attract crossover buyers like insurance companies and hedge funds.
Alan Schankel, director of fixed-income research at Janney Montgomery Scott, noted that Municipal Market Advisor 30-year ratios of 114% and 115% between municipal bonds and Treasuries could bring in alternative investors.
“I think you’ll get some support for things like Liberty bonds, and you might even get crossover buyers coming in because ratios are so attractive on the 30-year maturities,” Schankel said.
Ratios on the Municipal Market Data index are below the MMA index. The ratio between New York 30-year tax-exempt bonds and the 30-year Treasury note was 92.36%, as of April 6, according to Thomson Reuters.
Tom Doe, chief executive officer at MMA, said Goldman’s experience with crossover buyers could help the Liberty bond pricing.
“They’re probably the right firm for the deal because of their size and their knowledge of the alternative investor who might have an interest, as opposed to a firm that might be more dependent on retail or mutual funds for distribution,” Doe said.
While muni issuance has been light this year as issuers wait for demand to return, New York State and New York City have managed to price several bond sales. The New York City Transitional Finance Authority last week boosted its refunding deal by $150 million to $650.2 million due to strong demand.
New York State sold $829 million of general obligation bonds last month via competitive bid. Also last month, the New York City Municipal Water Finance Authority issued more than $540 million of new-money and refunding debt, the Port Authority sold $225 million of refunding debt subject to the alternative minimum tax, and the state’s Metropolitan Transportation Authority issued a $127.9 million refinancing deal.
“There hasn’t been a whole lot of volume overall anywhere, but there have been a few New York deals,” Schankel said. “I don’t think this Liberty bond deal will run into too much headwind.”
In addition to the fixed-rate bonds and the floating-rate debt, officials plan to sell $80 million of “completion bonds” that would help finance construction at Tower 4 or Tower 3.
