Deal in Focus

Jacksonville Bonding to Get Better

BRADENTON, Fla. — Jacksonville officials hope to net big savings next week when they price $557.5 million of refunding bonds.

Two transactions are being sold: $355.2 million of Better Jacksonville infrastructure sales-tax revenue refunding bonds and $202.3 million of transportation revenue refunding bonds.

Retail sales will be on Tuesday and institutional sales will be Wednesday.

The city expects the deals will sell well above its 5% present-value savings threshold for refundings, and save as much as $46 million .

Proceeds will be used for debt service savings in every year of existing maturities of the bonds being refunded, according to chief financial officer C. Ronald Belton.

The same syndicate is pricing both transactions, with Goldman, Sachs & Co. as the bookrunner.

“When marketing two financings at the same time, it is much easier to manage order flow when using the same syndicate,” Belton said. “Communication regarding moving orders from one financing to the other is much more effective than if you used two different firms.”

The city is selling the two deals concurrently because the “credits are similar, which offers advantages in marketing the bonds for sale,” he said, adding that the underwriters can tell a consistent story about the city and its economic recovery.

In recent years, as a result of the economic downturn, Jacksonville has faced “significant fiscal challenges” with affects on taxable property values, sales tax collections, state revenue sharing, and new laws restricting the city’s ability to raise ad valorem taxes, according to bond documents.

The city responded by imposing new fees, increasing reserves to $107 million in fiscal 2011 from $86.7 million in 2010, and reducing employee benefits.

Belton said sales tax revenue increased in 2011 and development activity is beginning to rebound.

In 2000, voters approved the Better Jacksonville plan, which provided a blueprint for $2.25 billion in infrastructure projects supported by a half-cent sales tax and $750 million for transportation improvements backed by gas and existing transportation sales taxes. Some of the bonds issued to support the Better Jacksonville program are being refunded next week.

The $355.2 million of sales tax refunding bonds are secured by a voter-approved, half-cent infrastructure sales tax that will be collected in the city through December 2030.

The infrastructure deal is structured with serial maturities from 2014 to 2030, and is expected to bring an estimated net present-value savings of $24 million, or 7% of refunded bonds.

The ultimate size of the deal depends on market conditions, according to David Moore, a managing director at Public Financial Management Inc., the city’s financial advisor.

“This deal has maturities up and down the yield curve,” Moore said. “It really has pieces for all types of investors from the short end all the way out to nice-size blocks in the 20-year to 30-year range.”

Ahead of the deal, Fitch Ratings downgraded the sales tax revenue bond program to A-plus from AA-minus, largely due to a decline in maximum annual debt-service coverage.

Pledged revenues increased 3.4% in fiscal 2011 resulting in coverage of 1.27 times.

“Coverage is slightly improved from the year prior, but Fitch believes future growth will be modest at best, and that coverage will remain within a band more consistent with the lower ratings,” the agency said.

Fitch assigns a stable outlook to the credit.

Before rising in 2011, the revenue Jacksonville received from the half-cent sales tax declined four years in a row, from a high of $86.8 million in the fiscal year ending Sept. 30, 2006, to $67.6 million for 2010.

The sales tax bonds are rated A1 by Moody’s Investors Service and A by Standard & Poor’s, both with negative outlooks.

The transportation revenue refunding bonds are being issued as $146.9 million of Series A bonds maturing from 2023 to 2031, and $55.4 million of Series B bonds maturing from 2012 to 2023.

The bonds are secured by a half-cent sales tax and a gas tax.

The Series A bonds are refunding all of the city’s 2001 outstanding transportation revenue bonds while Series B bonds are refunding 1997 bonds issued by the state on behalf of the Jacksonville Transportation Authority.

The estimated net present-value savings for the transportation bonds is $22 million, or 9% of refunded debt. Most of the savings will be taken over the first four to five years, according to Moore.

“I think it will help smooth the debt-service structure which is creating cash flow and helping to provide a little flexibility,” he said.

Fitch and Moody’s downgraded the transportation bonds ahead of the deal. Fitch dropped the rating to AA-minus from AA, assignin a stable outlook, and Moody’s slashed the credit to A1 from Aa2 with a negative outlook.

The transportation refunding bonds are rated AA-minus with a negative outlook by Standard & Poor’s.

Fitch’s downgrade is based on a 16.2% decline in pledged revenues between 2010 to 2006, which lowered maximum annual coverage to 1.49 times from 1.78 times.

Collections improved 3% in fiscal 2011 to provide 1.54 times coverage, “but Fitch believes the strength of recovery remains uncertain,” the agency said. “The absence of additional leveraging is also strongly considered in the current rating and outlook.”

Moody’s cited narrow debt-service coverage from “revenue sources that “remain lethargic” despite slight improvement in fiscal 2011.

“Further, the debt structure for the transportation revenue bonds includes an element of vulnerability associated with variable-rate debt (46% of post-refunding par) and swaps, especially given the passive nature of the revenue pledge,” Moody’s analysts wrote.

In addition to Goldman Sachs on next week’s offerings, the syndicate  includes CastleOak Securities LP, Loop Capital Markets, Morgan Stanley and Wells Fargo Securities.

Greenberg Traurig PA and Ezell Law Firm PA are co-bond counsel. Ballard Spahr is underwriters’ counsel.

Jacksonville, in northeast Florida, is a consolidated government and the state’s most populous city with 864,601 people.

When the city merged with Duval County in 1968, its land mass increased to 841 square miles from 39 square miles. The consolidation excluded the town of Baldwin and the cities of Atlantic Beach, Neptune Beach and Jacksonville Beach.

A new Duval County courthouse, expected to open later this year, is a major centerpiece of the Better Jacksonville infrastructure bonds program.



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