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N.Y.C. Transitional Finance Agency Set to Sell $900M of Fixed-Rate Debt

The New York City Transitional Finance Authority is scheduled to sell $900 million of fixed-rate future tax-secured bonds in two sub-series on Wednesday.

There will be a two-day retail order period beginning on Monday for the first $800 million sub-series of tax-exempt subordinate bonds.

Barclays Capital is lead underwriter for the tax-exempt bonds.

The TFA, an instrumentality of the state of New York, will also auction $100 million of taxable subordinate qualified school construction bonds on Wednesday in a competitive sale.

Alan Anders, executive director for the TFA, says the structure is often used by the authority.

“We’ve actually done it in the past and it’s worked well. It’s is small enough that it’s worth doing,” Anders said.

The TFA will often have a deal with tax-exempt bonds that integrates taxable bonds into the structure with a competitive sale, he added.

In its last offering of future tax-secured bonds in November, the TFA sold $600 million of tax-exempt bonds in a negotiated sale, and auctioned $200 million of taxable bonds and $100 million of QSCBs in a competitive issue.

Currently, the authority has up to $150 million of bonds that don’t qualify for tax exemption, according to Anders.

The deal will be the second largest scheduled deal for the week, after California’s $1.3 billion general obligation bond offering that’s slated for final pricing on Thursday.

The TFA has around $19.2 billion of outstanding future tax-secured bonds.

Proceeds from the tax-exempt bonds will be used for general capital expenditures in New York City.

The QSCBs are part of a bond program created by the American Recovery and Reinvestment Act of 2009, under which the bonds can be issued as tax-credit bonds or taxable direct payment bonds, similar to Build America Bonds.

Issuers who choose to issue the QSCBs as direct-payment bonds receive a cash subsidy payment from the U.S. Treasury Department in the amount of the lesser of either the tax-credit rate or the taxable interest rate at the time of the sale.

The Recovery Act provided for the issuance of $11 billion of QSCBs in 2009 and $11 billion in 2010, but issuers can carry forward any unused allocation. For 2010, New York City was allocated $664 million of the bonds.

 The TFA is issuing its QSCBs as taxable direct-payment bonds and will receive a cash subsidy. Proceeds from the bonds will be used to finance costs of construction, rehabilitation or repair of public schools.

The preliminary official statement includes a list of 51 schools in all five boroughs with projects that can by financed with QSCBs.

Proceeds from the sale will be used to finance school projects at some or all of the schools.

The taxable QSCBs will mature in 2034, according to the preliminary official statement.

Maturities for the tax-exempt bonds have not yet been announced, Anders said last week.

The bonds were not yet rated as of Thursday, but the authority’s outstanding subordinate-lien bonds are rated AAA from Standard & Poor’s and Fitch Ratings, and are Aa1 rating by Moody’s Investors Service, according to the TFA.

Rob Williams, director of income planning for the Schwab Center for Financial Research, said that despite greater interest in lower-rated debt, demand for higher quality bonds still remains strong.

“There’s a desire for those large blocks with high liquidity and high quality. The market hasn’t had a problem absorbing those deals,” Williams said.

The TFA’s $900 million November deal saw tax-exempt bonds yield from 2.84% with a 4% coupon on bonds maturing in 2022 to 4.18% with a 5% coupon on 2038 bonds.

JPMorgan won the bids for both competitive taxable offerings with yields ranging from 0.63% in 2013 to 3.00% in 2021 for the future tax-secured bonds. The 29-year QSCBs saw a 4.00% yield.

Anders would not comment on the expected interest rates for Wednesday’s deal, but said the authority is hoping for a strong demand.

Some of the tax-exempt bonds will be subject to optional redemption and the QSCBs will be subject to make-whole optional redemption and extraordinary optional redemption.

The bonds, which will be issued as parity debt subordinate to senior debt service and the TFA’s operating expenses, are payable from personal income tax revenues and sales tax revenues.

The state comptroller holds personal income tax revenues in trust for the authority and deposits the revenues with the trustee for payment of debt services and other expenses.

According to the preliminary official statement, personal income tax revenues are projected to be around $8 billion, $8.6 billion, $8.6 billion, $9.2 billion and $9.6 billion in fiscal years 2012 through 2016, respectively.

Sales tax collections are remitted to the state comptroller’s office, which then transfers them to the TFA if personal income tax revenue is projected to be insufficient to provide at least 150% of maximum annual debt service on outstanding bonds.

Thomas DiNapoli is the state comptroller.

Sales tax revenues are projected to be around $5.9 billion, $6.1 billion, $6.4 billion, $6.6 billion and $6.9 billion in fiscal years 2012 through 2016, respectively.

Sidley Austin LLP is bond counsel and Public Resources Advisory Group is the financial advisor.

Anders said the TFA has another sale of up to $800 million of tax-exempt fixed-rate bonds scheduled for June, but did not have any further details of the offering.

For fiscal 2011, the TFA issued $3.6 billion of new-money future tax secured bonds.

The TFA, created in 1997 to issue bonds and borrow money to finance a portion of New York City’s capital plan, is authorized to issue up to $11.5 billion of bonds.

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