BRADENTON, Fla. - Birmingham, Ala., is preparing to price this month nearly $20 million of fixed-rate general obligation debt to refinance variable-rate GO capital improvement warrants, which are similar to bonds.
It is the city's first venture into the bond market to restructure variable-rate debt due to the exorbitant cost of a liquidity facility, a situation that many issuers have experienced in today's market.
The city's outstanding variable-rate debt following the upcoming sale will be about 3% of its approximately $550 million portfolio, which does not include any swaps.
The double-A rated, Series 2009A fixed-rate bonds are expected to price the week of July 13, said Birmingham finance director Steve Sayler.
The transaction is expected to be structured with serial bonds matching the outstanding maturities of the Series 2004A variable-rate warrants that are being converted to fixed rate.
The new debt, maturing from 2010 to 2025, will not be insured since the new bonds are highly rated and insurance would not be cost-effective, according to Sayler.
The Series 2004A variable-rate bonds were originally sold with a standby warrant purchase agreement from SouthTrust Bank, which later merged with Wachovia Bank NA.
Sayler said the cost of a liquidity facility increased by three times, and eventually was canceled by the provider. The cancellation triggered acceleration of the principal payments over four years, instead of the remaining 15-year life of the original bonds, with repayments due to begin soon.
"We do feel like now is the time to fix a rate like this, not only because of the accelerated principal repayment, but also for the prospects of variable rates to go up in the future," he said.
Birmingham is Alabama's largest city, and the seat of Jefferson County, which has experienced financial problems for more than a year largely because of nearly $3.2 billion of hedged variable- and auction-rate debt that it failed to restructure last year. Sayler worked on the county's sewer deals as Jefferson's finance director from 1989 until Oct. 1, 2007.
Sayler went to work for Birmingham in December 2007, well before the market meltdown disrupted Jefferson County's ability to restructure its debt.
The county "needed to do what everybody else in the country has been doing since last year and restructure," Sayler said. "You take your hit, manage your debt, and eliminate problems as much as you can."
That is why Birmingham is moving forward with restructuring its debt, Sayler said, noting that he does not expect to experience trouble pricing the city's small upcoming deal.
"Although Birmingham is in Jefferson County, we are not Jefferson County," he said. "And we do have the affirmation of the rating agencies."
The Series 2009A bonds were rated AA-minus by Fitch Ratings, Aa3 by Moody's Investors Service, and AA by Standard & Poor's. All three agencies affirmed their ratings on Birmingham's outstanding debt.
Fitch and Standard & Poor's also assigned a stable outlook to the city's credit.
While Moody's does not assign outlooks to municipal debt, a report by analyst Christopher Coviello said the agency's Aa3 rating "reflects a diverse and regionally important economy, as well as a stable financial position, marked by conservative management, and solid reserve levels. The rating also takes into consideration an above-average but manageable debt burden."
Coviello said Moody's expects the city's $21.8 billion tax base will remain stable over the near term, given its location in north central Alabama.
Standard & Poor's noted that Birmingham officials recently adopted a formal debt policy that will limit, among other provisions, the amount of variable-rate debt outstanding the city can have at any one time.
"While the general fund remains healthy, Fitch remains concerned about the long-term viability of the city's general bond debt service reserve fund," said a report by analyst Christopher Hessenthaler. "Supported by a dedicated property tax levy that stands at its constitutional limit, annual debt service obligations of the fund continue to exceed revenue collections, resulting in a continued decline in fund balance."
He said the eventual depletion of the fund would compel the general fund to assume the burden of paying annual debt service on outstanding GO bonds.
"Offsetting this risk, however, is a strong $82 million current fund balance in the Birmingham Fund, which is a trust account created from proceeds of the sale of the city's industrial water utility," Hessenthaler noted.
Birmingham's upcoming deal will be underwritten by Banc of America Securities-Merrill Lynch. The city's financial adviser is Terminus Securities LLC.
Bond counsel is Sirote & Permutt PC. Disclosure and underwriters' counsel is Maynard, Cooper & Gale PC.
