Oakland County COPs Get One Bid

CHICAGO — Though Oakland County, Mich., finance officials received just one qualified bid on their $570 million taxable certificates of participation retiree medical benefits issue that sold competitively last week, finance officials said they were generally pleased with the pricing results that fell within their range savings range. The COPs were sold through the 2007 Oakland County Retiree Medical Benefits Funding Trust and secured by the county’s pledge to pay debt service under a contract between the county and the trust, not subject to an annual appropriation. The funds will go into a trust with proceeds and their earnings funding the county’s annual required contribution needed to fully fund its unfunded liability for retiree healthcare benefits.The winning bid on the Thursday sale was submitted by Lehman Brothers providing a true interest cost of 6.23%. A 2008 maturity carried a 5.4% yield and 6% coupon while the 2027 maturity garnered a 6.345 % yield with a 6.25% coupon. The spread to Treasury yields – which provides the benchmark because the bonds were not exempt from federal taxes – was 50 basis points on the short maturity and 116 on the final one. Some market participants, however, noted that it was not unusual for the debt to trade somewhat cheaper to Treasuries, especially given their structure as COPs and not traditional bonds. However, even yields on a triple-A rated corporate bond captured lower yields with a 20-year bond at 6.21%. The county did receive a second bid – from Depfa Bank – but its proposed structure did not qualify under the bidding terms, according to county treasurer Pat Dohaney. The triple-A rated county surprised many market participants in opting to go with a competitive sale over a negotiated one because the COPs represented a new credit and a first-of-its-kind sale in Michigan that was expected to generate overseas interest. Such characteristics qualify the credit as a “story” bond, which some believe is better sold through negotiation.“We thought the rates were a little higher than we wanted, but they work for what we are trying to accomplish,” Dohaney said. “Overall we are fine. We feel that was the rate for the day. We don’t have any regrets.” The county had aimed for a TIC in the 5.7% range, but manager of financial services Tim Soave said the TIC would still limit debt service to about $49 million annually. The county will trade what would have been a $60 million payment next year to fund the liability – a figure that would escalate over the next eight years -- for the debt service payment. Officials originally hoped to issue GO debt, and won state legislation authorizing it only to see it vetoed by the governor.The use of competitive verse negotiated sales – especially in a market where spreads have tightened over the years – is a never-ending subject of debate. Bankers argue there’s little savings for an issuer to squeeze out at auction with tightening spreads. Independent financial advisers will counter that there’s little reason to use negotiation on a simple transaction or even on more complex one as long as a good adviser is at hand. Issuers vary. Negotiated deals allows for quick action on structure and timing, while competitive deals remove any question of political favoritism.Overwhelmingly, issuers coming to market with a new credit, especially a taxable one, have opted for a negotiated sale. Oakland County, on the advice of its financial team that included the advisory firm Michigan Municipal Finance Consultants Inc. and Axe & Ecklund PC. The firms share offices and John R. Axe, is president of the advisory firm and a partner at the law firm. Both firms have worked with the county on prior bond issues.Oakland officials said they believed strong demand from foreign buyers and domestic interest for the top-rated credit would drive demand and result in a solid competitive bidding process. It was unclear precisely why the deal received so little interest, although several municipal traders said the structure sapped their appetite.The structure limited bonds to serial maturities and the bid sheet did not include provisions to include term bonds which some dealers sometimes prefer because they typically come in large blocks and provide stronger liquidity. “We didn’t think including terms would save us enough,” Dohaney said of that structural decision. Dohaney also said some potential bidders complained of the seven-year call feature – short compared to the standard 10-year lock on rates.The bonds were rated Aaa from Moody’s Investors Service and AA-plus from Standard & Poor’s. The financing marked a new effort in the state to fund a local government retiree health care costs -- a category of benefits that falls under other post-employment benefits, which the Governmental Accounting Standards Board is requiring governments to report in the coming year on an accrued basis. Most governments previously reported and paid the liability on an annual pay-as-you-go basis. Dakin Campbell contributed to this story.