WASHINGTON — The District of Columbia expects to issue $522.4 million of Build America Bonds before the end of the year. The capital city is planning to use the general obligation credit for the first time in two years in one of the deals to maximize the BABs savings.
The district has not issued long-term GOs since 2008, preferring instead to issue its higher-rated income tax-secured revenue bonds. However, the district will hit its legal limit for income tax-secured bond issuance before the end of the year. District officials said they are wagering a better savings rate can be achieved by issuing GO BABs now, rather than issuing income tax-secured bonds as traditional tax-exempt debt next year — assuming the BAB program expires on Jan. 1.
The December BAB deal will come in two pieces. The district plans on Dec. 2 to sell $342.4 million of Series 2010F income tax-secured revenue bonds, which will mature in 2025, 2030 and 2035. A week later, the district expects to sell $180 million of GO BABs.
The income tax-secured bonds are rated Aa2 by Moody’s Investors Service and AAA by Standard & Poor’s. A rating from Fitch Ratings is still pending, said Lasana Mack, the district’s treasurer. Ratings for the GO bonds have not been affirmed yet, but the district’s GO bonds were previously rated A1 by Moody’s and A-plus by Standard & Poor’s and Fitch.
The bonds will finance capital projects approved in the district’s budget for fiscal 2011, which started Oct. 1. About half of the projects are city school improvements, Mack said.
Citi and Siebert Brandford Shank & Co. are the lead underwriters for the Dec. 2 deal along with six co-managers. Venable LLP is the bond counsel and Hawkins Delafield & Wood LLP is the district’s disclosure counsel. The underwriters are represented by Hogan Lovells LLP and McKenzie & Associates. Phoenix Capital Partners and Public Resources Advisory Group Inc. are the financial advisers. Bond documents for the GO deal have not been finalized.
In March 2009, the district issued its first income tax-secured revenue bonds, which were approved in late 2008, with a coveted AAA rating from Standard & Poor’s. Since then, the district has financed its debt almost exclusively with income tax-secured bonds.
In March 2010, the district issued $696 million of income tax-secured bonds to refund GO bonds and get the district under its 12% debt-to-liabilities cap. With that large refunding, the district “used all the existing authority that we have” for income tax-secured bonds, Mack said.
On Monday, the district sold $63.6 million of income tax-secured variable revenue refunding bonds based on the Securities Industry and Financial Markets Association variable rate, Mack said. The district also plans to sell $88 million of Garvee bonds before the end of the year, he said.
On Tuesday, Mayor-elect Vincent Gray announced the district faces a $188 million budget gap for fiscal 2011 and an estimated $345 million gap for fiscal 2012.
Gray said in a statement he would like to establish a $50 million reserve fund to cushion any further budget gaps. The district set up a similar fund in fiscal 2009. The fund would be separate from the district’s Congressionally mandated rainy-day fund, which requires a stringent repayment schedule.
Gray also proposed a freeze on all capital projects that have not yet begun. Mack said this freeze would not affect the district’s planned debt issuance for fiscal 2011 because the projects have already been started. But a freeze may reduce the district’s debt issuance in fiscal 2012, he said.