LOS ANGELES -- With an enhanced bond structure, Morgan Hill, Calif., was able to price a deal to refinance its redevelopment debt with relatively low credit spreads despite investor concerns in the aftermath of the state government’s dissolution of redevelopment agencies.
After waiting months for a court judgment that would strengthen the bonds, Morgan Hill, acting as a successor agency to its former redevelopment agency, priced $88.7 million of tax allocation bonds Nov. 19 to refund its outstanding variable rate bonds.
About $74 million were tax-exempt bonds and $14 million were taxable. Morgan Stanley priced the deal.
“With our new and improved bond structure, two newly-minted AA-minus ratings, more than two full weeks of pre-sale marketing and investor outreach, and a good tone to the market on the day of pricing, we felt emboldened to go out with an aggressive interest rate scale during the institutional order period,” said Steven Gortler, the successor agency’s financial advisor. “For the most part, our confidence was rewarded.”
The city booked about $12 million of orders during the retail order period, and layered in semi-annual principal maturities from 2019 through 2023 to take advantage of the relatively steep yield curve, Gortler said.
The 2032 and 2033 maturities sold out at the proposed rates, but to fill the order book, the city had to cheapen the 2031 maturities by one basis point and the 2027, 2028, and 2029 maturities by two basis points each.
In the tax-exempt portion, yields ranged from 1.72% and 1.8% with a 5% coupon in a split 2019 maturity to 4.56% with a 5% coupon in 2033. Compared to similar deals from successor agencies this month, Morgan Hill’s deal came with some of the tightest credit spreads.
“I’d be surprised if there’s another post-dissolution redevelopment deal out there that can match the Morgan Hill results in terms of credit spreads,” Gortler said.
Compared to a $96.6 million deal from the Successor Agency to the Brea Redevelopment Agency, priced by Stifel Nicolaus on Nov. 14, the Morgan Hill bonds priced better in every maturity from 2018 through 2026, and in some maturities by a wide margin.
For example, the Brea’s 2021 maturities priced with at 2.78% with a 5% coupon for a spread of 56 basis points above the triple-A Municipal Market Data scale. Morgan Hill’s 5s of 2021 priced 8 basis points tighter.
Both successor agencies carry a AA-minus rating from Standard & Poor’s. Morgan Hill’s agency is also rated AA-minus by Fitch Ratings.
The agency also fared better than a slightly lower rated deal from the Imperial Beach Successor Agency, priced by Piper Jaffray on Nov. 20. With double-A ratings, insured by Build America Mutual, and an underlying A rating, the agency’s 2033 maturity priced with a spread of 120 basis points. That compares to a yield-to-maturity on Morgan Hill’s 2033 bond that had a much tighter spread of 96 basis points.
Further down the credit spectrum, a smaller A-plus rated Grass Valley Successor Agency deal came wider with a spread of 129 basis points in 2033. Piper Jaffray priced the deal on Nov. 15.
The tighter spreads are a result of the agency’s efforts to implement several enhancements to the bonds in an attempt to relieve investor worries in the aftermath of the redevelopment agency wind-down.
“In marketing the bonds, the one comment we heard repeatedly was that investors really liked our flow of funds, whereby the County Auditor-Controller remits pledged tax revenues directly to the trustee each year on January 2, in the full amount necessary to pay annual debt service,” Gortler said.
Other enhancements to the structure include a tri-party indenture, the subordination of the agency’s statutory pass-through payments, and prohibiting the any further issuance of parity debt.
The agency also obtained a validation judgment that establishes primacy of the statutory lien on the pledged tax revenues in favor of bondholders.
Gortler said the agency was extremely pleased with the sale results, but disappointed that several large institutional investors chose not to participate due to concerns about secondary market liquidity, as well as lingering concerns about redevelopment debt.
“Hopefully, as more deals come to market the investor base will broaden and spreads will narrow further,” he said.
The city was forced to act because of an expiring letter of credit on its former redevelopment agency’s outstanding bonds. Morgan Hill is about 70 miles south of San Francisco and 20 miles south of San Jose, with a population of about 38,000.
