DALLAS – El Paso County, Texas, not only complied with a new Treasury rule that guides issuers on how to take pre-emptive action on debt that could later lose its tax-exempt status, it saved money in the process.
The county achieved present value savings of 5.1% by advance refunding $40 million of tax-exempt debt with taxable bonds.
"It was really a case of killing two birds with one stone," said Wallace Hardgrove, county executive director for budget and fiscal policy. "Our collective finance team felt that this was the smart thing to do."
The new rule went into effect in January to guide issuers on when and how they can take "anticipatory remedial actions" on tax-exempt debt.
The rule allows issuers to redeem or defease bonds if they declare their intent in advance. The declaration of intent must identify the financed property or loan that the anticipatory remedial action would involve and describe the action that could result in the private business tests being met.
"The Treasury Department finalized regulations last fall on anticipatory remedial actions, and I would expect that we will see more of these sorts of transactions," said Bill Daly, director of governmental affairs for the National Association of Bond Lawyers.
In the case of El Paso County, officials wanted to remove the tax-exempt constraints on debt for four facilities: a sports park, a golf course, an arena and a detention facility. Doing so would allow the county to raise private revenue from naming rights or other uses of the first three facilities and eliminate tax issues if the county houses federal inmates in the detention center.
County officials posted an event notice on the Municipal Securities Rulemaking Board's EMMA website to specify which bonds and certificates were involved.
"It's really new," said Rudy Segura, the county's bond counsel with McCall, Parkhurst & Horton. "This is the first time we have worked on an anticipatory remedial action pursuant to this new regulation."
Hardgrove said the refunding gave the county the flexibility to raise revenue from the facilities if the opportunity arose.
"If it makes sense to outsource our facilities, we want the flexibility to do that," Hardgrove said. "As governments are faced with growing needs, I think they need to think outside the box and look at the full spectrum of how they run their operations."
Because taxable bonds usually pay higher interest rates than tax-exempts, the net present value savings of $1.9 million was significant.
"In a typical situation like this it would cost the issuer money to take remedial action," said financial advisor Mark Valenzuela, first vice president at George K. Baum & Co. "Here they were able to save money and remove those tax-exempt strings."
Ramirez & Co. was lead manager for the deal, which priced March 15. The bonds advance refunded a portion of the county's certificates of obligation issued in 2001, 2007 and 2012. General obligation refunding bonds from 2007 and 2011 were also taken out.
The refunding bonds, issued as general obligation debt, carried ratings of Aa2 from Moody's Investors Service and AA from Fitch Ratings.
On final maturities of 2032, the refunding produced yields of 3.66% on coupons of the same rate, according to the official statement.
"It certainly is an issuer's market," Hardgrove said of the deal. "There's definitely an opportunity for issuers to effectuate savings."
