SAN FRANCISCO – Morgan Hill is set to become one of the few municipalities in California to refinance redevelopment debt since the state shut down redevelopment last year.
It plans to use special tactics to entice investors to its $100 million deal.
The city, which is the “successor agency” to its former redevelopment agency, plans to issue $100 million of tax allocation bonds sometime this fall because it cannot find a bank to renew a Scotiabank letter of credit backing the $97 million of outstanding debt it issued in 2008.
“It’s been a lengthy process,” Morgan Hill Mayor Steve Tate said in an emailed statement. “Unfortunately, given the current state of redevelopment in California, no other bank is willing to replace Scotiabank, so our hand is being forced.”
Tate said Scotiabank told Morgan Hill it is winding down its municipal credit enhancement business and would exit the sector.
In an effort to try to entice investors and lower its interest rates on the refunding, the city’s finance director, Kevin Riper, said it will add special tweaks to the bond structure.
The successor agency will seek a validation judgment from Superior Court, the bonds will have a tri-party indenture, and the debt will include a reworked continuing disclosure agreement.
“We are seeking a validation judgment in order to establish the primacy of the statutory lien on pledged tax revenues in favor of bondholders,” said Steven Gortler, an independent financial advisor based in San Francisco working with the agency. “By validating the security for the bonds, investors will be fully protected if either the courts or the Legislature change the law again.”
Redevelopment agencies were dissolved in 2012, and the wind down has been complicated.
The bond indenture will include covenants with the Santa Clara County Auditor-Controller to remit the pledged tax revenues directly to the trustee every Jan. 2 to ensure they are not used for other enforceable obligations or released to other local taxing entities until after the full payment is made.
Morgan Hill is a city of about 38,000 about 21 miles southeast of San Jose.
City Manager Steve Rymer said a successful refinancing would benefit all the other agencies benefiting from the tax increment now collected from the former redevelopment area due to the dissolution.
For example, the county gets 14.3% of property taxes collected in the RDA project area and the Morgan Hill Unified School District receives 44.6%.
“Therefore, if we can shave 50 basis points off the interest rate on the bonds by bolstering the credit, then the county general fund will realize an additional $750,000 over the life of the bonds and the school district will net almost $2.4 million,” Rymer said in the statement.
The successor agency should receive approval from the state Department of Finance to issue the bonds within the next few weeks, and plans to price the debt after getting the final validation judgment sometime this fall, according to Riper.
The agency is now soliciting credit ratings and readying a request for proposals for an underwriter.
“It’s hard to predict just how well the Morgan Hill bonds will price,” said Gortler.
Only three tax allocation refunding bond deals have sold since the dissolution of redevelopment in the state due in part to the chaos caused by the unwinding process. Refunding bonds sold by Monrovia and Dinuba were rated triple-B minus.
Upland recently sold $22 million of 10-year refunding bonds with an underlying rating of A, bolstered with insurance from Assured Guaranty.
