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Birmingham, Ala., to Sell $75M of GOs

MAR 13, 2013 3:16pm ET
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BRADENTON, Fla. — Birmingham, Ala. is coming to market next week with a $75 million general obligation sale and a firm message — that the city may be in Jefferson County but does not share the county's fiscal woes.

To spark additional interest in the deal, city finance director Tom Barnett said he obtained a fourth review of the transaction from the Kroll Bond Rating Agency to provide prospective investors with greater clarity about the distinctions that separate Birmingham, the seat of Jefferson County, from the ongoing bankruptcy of the county government.

Kroll also provided the city with its fourth double-A rating, and stable outlook, on the bonds.

The 30-year offering prices Tuesday. It is structured as $72.8 million of Series 2013-A bonds and $2.2 million of Series 2013- B. Series 2013-A is structured as convertible capital appreciation bonds.

The CABs will not begin to amortize principal and compounded interest until March 2017. After that date, the bonds will convert to a traditional coupon schedule with principal and interest payments twice a year.

The bonds are secured by a general obligation pledge supported by all taxes and revenues collected by the city that do not have restricted uses, as well as the city's full faith and credit. Birmingham intends to pay the bonds with an ad valorem tax dedicated to debt service, though it is not specifically pledged.

The convertible CAB structure is being used because revenue in the sinking fund that receives the dedicated property tax is not expected to be available for payments on the 2013 bonds until 2017, according to Barnett.

After 2017, the deal is structured to provide the city with level debt service payments.

Proceeds from the sale will be used to make various capital improvements, including solid waste facilities, parks and recreation, streets and sidewalks, public buildings and equipment, as well as storm and wastewater sewers. The Series B bonds will finance industrial park and economic development projects for private, nonprofit organizations.

Some investors have shown interest in the transaction because of what is expected to be "marginally" higher yields since the bonds are CABs for four years, and then convert to a coupon structure, said Barnett.

"There's some interesting play in terms of yield there," he said, declining to estimate the added cost. "It is bringing in a number of different types of buyers between the markets for CABs and regular coupons.

"The high quality of the bonds is also a factor in the interest that seems to be developing, so more demand should drive [borrowing cost] down."

The bonds are rated AA by Fitch Ratings, Kroll, and Standard & Poor's, while Moody's Investors Service assigned an Aa2 rating.

All four raters assign a stable outlook to the credit.

Bennett said a rating was sought from Kroll to help investors better understand the differences between the city and bankrupt Jefferson County.

"We still have a lot of investors confusing us with Jefferson County, so we thought maybe a new, in-depth report might give investors a clearer picture," he said. "I think they pointed out our legal status and ability to tax whereas the county is much more restricted."

Kroll said its No. 1 determining factor supporting the city's AA rating has to do with governance, including a "strong" statutory framework for managing finances and debt.

In addition, Kroll said Birmingham's status as a home rule city gives it the ability to adjust revenues.

Counties in Alabama do not have home rule, and require the Legislature's approval to raise new revenue.

In a detailed discussion of the circumstances underpinning Jefferson County's Chapter 9 filing, Kroll noted the repeal of a state-authorized occupational tax that provided a major source of revenue for the county's general fund. The loss of the occupational tax precipitated the county's bankruptcy filing in November 2011, though the county's over-leveraged sewer system was also saddled with $3.1 billion in defaulted debt.

While cities and counties in Alabama are authorized to file for bankruptcy under state law, Kroll said it views the risk of bankruptcy for Birmingham as remote.

The city's "fundamental credit support is provided by a diverse and growing economic base, conservative debt policies, and sound financial management," said the agency.

While Jefferson County collects property taxes on behalf of the city, the county's bankruptcy has not impacted distribution of tax revenues to Birmingham, according to Kroll.

Moody's report on Birmingham's sale next week discussed Jefferson County's bankruptcy and noted that the Chapter 9 filing was due, in part, to the sewer debt.

Birmingham's sewer service is provided by the county.

Negotiations are under way to resolve the debt crisis, and remedies under discussion include potentially large sewer rate increases, said Moody's, adding that it will "continue to monitor any potential effects of Jefferson County's credit issues on the city's credit strength."

While noting Birmingham's stable finance position and diverse economy, analysts from all four rating agencies pointed out that the city has not fully funded its annual required pension contribution for some time.

For fiscal 2012, the city contributed 76% of its ARC to its pension plans, which were 77% funded as of July 1, 2011, according to S&P. The city contributed 57% of its ARC in fiscal 2012 toward the liability for other post-employment benefits. At the end of last year, the city's unfunded OPEB liability was $64.48 million.

"The city has maintained a relatively stable financial profile through the stress of the recession," said Fitch analyst Michael Rinaldi. "The city's broad revenue raising authority and tendency for careful spending control bode well for future performance."

The city's financial policy requires a reserve equal to at least three months spending, which Fitch considers a sound practice and protection against risk associated with the volatile nature of several economically dependent revenue streams.

Birmingham is Alabama's largest city with a population of more than 212,000.

Rinaldi said the city "anchors a deep and diverse" employment base built around the education and the health-service sector "that should serve to promote long-term stability despite recent sluggish job growth."

Tuesday's transaction is the first of two GO sales that will total $150 million under an authorization overwhelmingly approved by Birmingham voters last year for infrastructure needs and economic development.

The second $75 million GO offering is expected to be sold in three to five years.

Loop Capital Markets is running Tuesday's sale. Other members of the syndicate are Gardnyr Michael Capital Inc., Goldman, Sachs & Co., Kipling Jones & Co., Merchant Capital LLC, Securities Capital Corp., and Terminus Securities.

Hand Arendall LLC and Walker LLC are co-bond counsel. Underwriters are represented by Sirote & Permutt PC.

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