LOS ANGELES — Demand in the municipal bond market remained robust enough last week to convince the Los Angeles Community College District's finance team to go ahead with plans to price $1.3 billion in tax-exempt and $70 million in taxable general obligation bonds this week.
The bonds will be sold to retail investors on Tuesday and institutional investors on Wednesday.
After determining mid-week that the market was digesting supply well, the district's finance team decided to march ahead with the combined refunding/new money sale, rather than holding off until the second week in January, said David Brodsly, the district's financial advisor and a KNN Public Finance managing director.
The fact that the week of Dec. 1 "sported the largest new muni supply totals of 2014 put issuers and buyers on edge as the week approached," said Harold L. Chip Hughey, III, vice president and senior trader with Caprin Asset Management. "But firm U.S. Treasury trading, favorable ratios and the general supply drought in 2014 supported activity despite the heavy primary."
In December, "people are wrapping up for the year and certain buyers, like insurance companies, often shut down early in terms of buying," Brodsly said of timing considerations. "You just have people away from their desks and sometimes there is a mini surge in supply."
While 30-day visible supply, at $18.7 billion is larger than it's been for most of this year, demand at the beginning of the month was hovering around $40 billion, although some of that will be absorbed by the secondary market, said Michael Johnson, co-CIO and head of municipal research at Gurtin Fixed Income LLC.
LACCD is pricing $325 million in 2008 Election Series G tax-exempt new money GOs and $25 million in federally-taxable 2008 Election Series H new money GOS. The refunding series are comprised of $1 billion in 2015 tax-exempt GO refunding bonds and $45 million in 2015 federally-taxable GO refunding bonds.
Morgan Stanley is book runner in a 10-party syndicate for the tax exempt bonds, while Ramirez & Co. Inc. is acting as the sole manager for the taxable bonds. Bond attorneys include Stradling Yocca Carlson & Rauth as bond counsel, Hawkins Delafield & Wood LLP and Luna & Glushon as co-disclosure counsel, and Nixon Peabody LLC as underwriter's counsel.
The district is miles away from where it was three years ago when an audit by State Controller John Chiang reported $140 million in voter-approved bond money for construction funds had been mismanaged, according to LACCD Chancellor Francisco Rodriguez, who started on June 1.
"There has been a wholesale transition in senior leadership for the bond program," Rodriguez said.
The district's construction program is now managed by Los Angeles-based AECOM, an international infrastructure and support services firm.
Jim O'Reilly, the executive director of facilities planning and development, was hired in March 2012 to replace the former facilities director who resigned after the audit's findings came to light. O'Reilly, a veteran construction manager, is a former vice president with Pasadena-based Parsons Corp., an engineering and construction firm; and also served as director of the Los Angeles Unified School District's $28 billion facilities program.
The district received the results of an audit of its construction bond program from KPMG LLP in November 2013 that gave the district "a clean bill of health," Rodriguez said.
Other changes include centralized controls and expense monitoring for the entire program and a more engaged citizen's bond oversight committee, he said.
The proceeds are funding a capital projects program that includes 379 identified projects, of which 203 have been completed since 2001 when the program to rehabilitate the nine aging community college campuses started.
"Voters approved a total of $5.7 billion through three bond measures passed in 2001, 2003 and 2008," Rodriguez said. "Before the program started, each of the colleges and district offices where in various stages of disrepair and neglect, because the state hadn't been able to provide support for the new facilities."
The community college district has nine accredited two-year colleges serving an 882-square-mile region with a population of 5.3 million. Every campus has construction projects underway. The projects include a new student union building at Los Angeles City College, a media arts center at Mission College, a digital media arts building at Pierce College and new math and sciences school at Los Angeles Southwest.
The district's finance team is anticipating aggregate savings of $95 million on the refundings for 10% of present-value savings, Brodsly said. True interest costs on the new money issues are expected to be around 3.4%, he said.
The deal should be well-received given a scarcity in the market of larger deals with longer maturities, Johnson said.
The fixed-rate bonds will have the following maturities, according to the preliminary offering documents.
The $325M tax-exempt Series G GOs have maturities ranging from 2015 to 2034. The $25M taxable series H GOs have maturities from 2015 to 2017. The $1 billion Series A GOs tax exempt refunding maturities range from 2015 to 2033. The $45M Series B taxable refunding GOs are maturing from 2015 to 2024.
The tax-exempt bonds have a 10-year par call and the taxables have a make-whole call, according to the road show presentation posted on munios.com.
The ratings bump the district received from Standard & Poor's ahead of the sale should also help, Brodsly said.
S&P raised the school district's rating to AA-plus from AA with a stable outlook in a Nov. 19 ratings report and assigned an AA-plus rating to the upcoming bond sale. Moody's Investors Service assigned an Aa1 rating to the planned bond sale on Nov. 6 and affirmed the same rating for the district's $3.6 billion in outstanding debt.
"The higher rating [for the school district] reflects our view of district management's continued strong commitment to maintaining what we consider a good reserve level," S&P Analysts Lisa Schroeer and Matthew Reining said in their report.
For the AA-plus rating on the upcoming sale, the S&P analysts cited the district's large and diverse property tax base in the strong Los Angeles economy, good financial performance with a history of strong general fund reserves, and operational flexibility with the ability to reduce class sections and the curriculum, if necessary.
The district's assessed value grew by 5.6% in 2014-15 to $660.2 billion, according to the road show presentation.
The district's plans to issue $500 million a year to keep up with its capital improvement plans somewhat tempers the strengths, particularly if the tax base growth fails to keep up it could have a negative impact on the overall tax burden, S&P analysts said.
The series G & H bonds will use $350 million of the $1.6 billion capacity the district has remaining under Measure J approved by voters in 2008, according to the roadshow presentation. The district has issued $4.1 billion of the $5.7 billion approved by voters in three elections since 2001.
As LACCD officials weighed their options on when to price last week, deals were being well-received and many credits experienced price bumps due to strong demand, Hughey said.
If a reasonable amount of rate stability extends into this week, muni participants should still be eager to get cash to work ahead of the holiday slow down, Hughey said.
"I would also expect the [LACCD] loan's reception to be extra enthusiastic," Hughey said. "Buyers of California debt remain particularly motivated in light of the state's below-normal issuance in 2014 and the state's demanding income tax code."
