BRADENTON, Fla. – Gilt-edged Charlotte, N.C., will sell nearly $150 million of general obligation bonds in two upcoming offerings during August.
The city plans to price $34.37 million of taxable GOs competitively on Aug. 13.
The proceeds will pay for low- to moderate-income units in a multi-family housing project. The taxable GOs will have 16-year maturities and level debt service payments.
Another $115 million of GO refunding bonds will price by negotiation on Aug. 22 with Wells Fargo Securities as the book-runner and Bank of America Merrill Lynch as senior manager.
The GOs are secured by the city’s full faith and credit, as well as unlimited taxing power.
“I’m optimistic that the bonds will price well,” said Charlotte Treasurer Scott Greer. “We tend to trade very well in the market.”
The refunding piece can be postponed if the deal doesn’t price as well as anticipated, he said.
DEC Associates Inc. is the city’s financial advisor. Parker Poe Adams & Bernstein LLP is bond counsel on both transactions. McGuireWoods LLP is disclosure and underwriters’ counsel on the refunding.
In the Aug. 22 sale, proceeds will current refund the city’s outstanding 2003A, B and C GO bonds within existing maturities. Charlotte anticipates present value savings of about 10% or $14 million with most of the savings going to reduce debt service.
About $1.5 million of the refunding savings will be taken upfront and the proceeds will be used to increase the funded level of the city’s other post-employment benefits, Greer said. OPEBs have not been available to new workers since July 1, 2009, though the city still contributes to the benefits for employees hired prior to that date.
Fitch Ratings, Moody’s Investors Service, and Standard & Poor’s affirmed their triple-A ratings on Charlotte GOs ahead of the deal. The agencies have stable outlooks on the city’s bonds.
Analysts praise the city for its strong and conservative financial management practices. Charlotte is a fast-growing city with a population of more than 775,000 and a diverse tax base, analysts said. The city is a regional economic hub with large transportation, banking, and commercial sectors.
General fund financial operations remain very healthy, according to Fitch analyst Michael Rinaldi. A preliminary operating surplus of $15 million is anticipated for fiscal 2013.
Overall debt ratios, about 4.5% of market value or $5,200 per capita, are moderately high but should not change materially as a result of future borrowing plans.
“Fitch expects the city’s role as a regional center for trade, transportation, health care, and financial services will contribute to a general trend of economic growth and stability,” Rinaldi said. “Recent expansion within technology, pharmaceutical, and energy sectors have the potential to boost already above-average income indices.”
Recovery continues in the Charlotte economy at a faster pace than in recent years, said Moody’s analyst Edward Damutz. The city’s unemployment rate was 8.4% in June. The city’s tax base is valued at $90.4 billion. The assessment base has averaged 5.8% growth over the last five years.
“Charlotte’s financial operations are expected to continue to be well-managed, characterized by considerable operating flexibility, a trend of ample reserves, and a strong cash position,” Damutz said.
The city’s 2014 budget includes a 3.17-cent property tax increase to fund a five year, $817 million capital improvement plan.
After this month’s issues, Charlotte will have $757.3 million of general obligation debt and an additional $922 million of appropriation-backed debt.
The city participates in the North Carolina Local Government Employees Retirement System defined benefit retirement plans sponsored by the state, but has its own plans for firefighters and law enforcement. The city paid its annual required contribution of $32.4 million or 6% of general fund expenditures.
“We consider Charlotte’s management practices strong under Standard & Poor’s Financial Management Assessment, which indicates our view that the city’s practices are well embedded and likely sustainable,” said S&P analyst Lindsay Wilhelm. “The city’s proactive and sophisticated financial management is reflected in its formalized policies and practices.”
Both Moody’s and S&P mentioned the ongoing controversy between Charlotte and state lawmakers over the ownership of Charlotte Douglas International Airport.
Charlotte issues bonds on behalf of the airport backed by a pledge of airport revenue. The airport is operated as a self-sustaining enterprise.
The North Carolina General Assembly recently passed a bill leaving Charlotte as the landowner but placing decisions over airport operations in the hands of a 13-member appointed commission. The commission would also have control over the airport’s finances.
Charlotte has issued $694 million of senior-lien airport revenue bonds for Charlotte Douglas, which are rated A-plus by Fitch and S&P, and Aa3 by Moody’s. About $175.2 million of special facility revenue bonds are also outstanding.
“We understand that there is no direct city obligation on the debt, nor does the city depend on airport revenue for its operations,” said Wilhelm. “We, therefore, would not expect any changes to the oversight of the airport to have a direct impact on the credit quality of either the city or the airport on the bonds.”
Charlotte Douglas, airport code CLT, is a major east coast hub for US Airways and saw passenger traffic reach a record high in 2012 with 41 million travelers, a 5.6% jump from 2011. The airport currently is in the midst of a $511 million multi-year capital program, and is planning to build a fifth runway.
In a special comment on the controversy that has resulted in litigation between Charlotte and the state, Moody’s said Tuesday that it does not expect “material impacts on the airport’s fundamental credit drivers if the resolution of control issues is done in a deliberate manner.”
However, “the evolving debate over airport leadership is a potential pressure” due to the pending merger of US Airways with American Airlines, according to Moody’s analyst Myra Shankin.
“Moody’s does not make a credit distinction between airports run by independent authorities versus municipal enterprises,” Shankin said. “We do not see any immediate, direct credit implications related to potential changes in CLT’s ownership structure or management.”
After reading bond documents Shankin said that Moody’s does “not see a change of control defined as an event of default nor do we see it impacting the airport’s ability to pay debt service.”
The bill authorizing a new commission to run the airport includes language that provides for the non-impairment of bondholders.
Moody’s said city officials have raised questions about whether a potential technical default would occur if the change in control of the airport caused the city to be unable to uphold the terms of the bonds.
“After discussions with city officials, we do not see any definitive answers to this question at this time,” said Shankin.
While the city has obtained a preliminary injunction blocking the transfer of control, the Federal Aviation Administration has also raised questions about whether the airport’s operating certificate could be transferred from the city to the commission.
Moody’s said the FAA’s decision on the airport’s operating certificate may provide guidance to the airport’s bond trustee about whether a technical default could occur.
