Florida creates primer on implementing new disclosure requirements
Florida got an early jump on implementing new continuing disclosure requirements Thursday while advance refunding its fourth tranche of what the state bond director views as worrisome Build America Bonds.
The state competitively priced $75 million of tax-exempt education lottery revenue refunding bonds to defease a portion of its 2010B taxable BABs, for which issuers receive a lower federal subsidy than originally promised due to federal sequestration.
“We're very happy today because JPMorgan paid a big price for our bonds and a low interest rate,” Ben Watkins, director of the Division of Bond Finance, said Thursday after taking bids. “It exceeded our expectations in terms of savings.”
The deal sold with a true interest cost of 2.16%, and generated $13.4 million in gross savings and $10.2 million in present value savings or 10% of refunded par. The day before pricing, Watkins said he expected around 9% in present value savings.
To ensure that the pricing went smoothly, Thursday’s deal was the first that Watkins’ division used a new continuing disclosure agreement to comply with additions required by the Securities and Exchange Commission’s rule 15c2-12.
Those additions, which go into effect for all issuers on Feb. 27, require CDAs to disclose material “debt-like” financial obligations such as bank loans and events that “reflect financial difficulty” related to those obligations.
Watkins, usually a critic of burdensome regulations on muni issuers, said the CDA additions are necessary. “They did a good job crafting the rule,” he said.
The Division of Bond Finance developed the new compliance mechanism early because the implementation date is approaching and Watkins said he wanted to ensure there would be no problems pricing the state’s bonds, which are typically sold competitively, a situation for which there is no opportunity to answer questions in advance as with a negotiated sale.
Watkins, who is an attorney, said he reviewed webcasts from several bond counsel firms and consulted with other market participants about necessary changes.
The division then revised the state’s CDA and underlined changes in a supplement to the preliminary official statement for Thursday’s pricing.
“We’re leading by example,” he said, adding that his division is planning to hold workshops with state agencies and universities that must report changes in obligations to his office within 10 days.
Watkins said he also hoped the model his office developed might assist other issuers and finance directors who don’t have the time or staff to develop their program and policies.
“If issuers have not proactively said, ‘We’ve amended the CDA and got policies and procedures in place,’ I’m not sure how underwriters would deal with that in terms of demonstrating having a reasonable basis for believing the issuer’s going to comply,” Watkins said. “If issuers don’t pay attention to it and address it right up front, it could create an impediment for firms bidding on their bonds.”
Nothing impeded Thursday’s pricing, which generated seven bids.
It was the fourth issue in which Florida has advance refunded BABs, which it structured with a conventional municipal bond 10-year call, in contrast with other issuers that sold bonds with more expensive make-whole call provisions more typical of corporate debt.
If the 2010B BABs hadn’t been refunded, Watkins said he expected to receive $12.8 million in subsidies over the life of the loan.
But Watkins said there were worrisome risks to leaving the debt outstanding, including that subsidy payments would continue to be lowered or eventually stopped by the federal government, which has been shut down for a month.
There was also the potential for the Internal Revenue Service to intercept subsidy payments if the state owed the federal government money for other programs, such as Medicare. That element of the subsidized deals soured Watkins on BABs early in the program, and he stopped issuing them.
“I no longer have to worry about that and I’m still saving $10 million,” he said, referring to Thursday’s savings. “That’s over and above not having to worry about $12.8 million in subsidy payments.”
Florida's four advance BAB refundings were for a total of $670 million, about half of the $1.3 billion of BABs it issued. The four deals generated combined gross debt service savings of $112 million and present value savings of about $80 million.
“I don’t have to worry about whether the feds are going to pay or not,” said Watkins, who added that he will continue to advance refund the debt as long as market conditions are favorable.