BRADENTON, Fla. — Tampa, Fla., Tuesday priced $121 million of water and sewer revenue bonds in a deal where more than half the sales went to retail buyers after the underwriters were incentivized to find them.
In a retail sales period Tuesday, investors placed $110 million of orders but the final amount allocated to retail was $63.25 million due to oversubscribed maturities. The remainder of the offering was sold the same day to institutional buyers.
The oversubscriptions from retail buyers allowed some maturities to be repriced at lower yields between 1 and 5 basis points, according to Jerry Ford, president of Ford & Associates Inc., financial advisor to the city.
“People were fighting for bonds,” he said.
Ford believed one reason the deal sold well was a unique strategy devised to get underwriters to be more competitive in selling it to retail investors, he said.
While Wells Fargo Securities senior managed the deal, the other underwriters were told that a co-senior manager would not be named until after the retail order period.
The co-senior managing title would go to the highest performer in retail sales. The advantages of the structure: earning 20% in underwriting fees, instead of 10% as a co-manager, and recognition in league tables.
At the end of the day, Raymond James & Associates Inc. earned the title.
The other co-managers were Bank of America Merrill Lynch, Loop Capital Markets and Morgan Stanley.
Of the bond proceeds, the city will use $14 million for new projects, $43.48 million to refinance commercial paper and $63.57 million to refund bonds issued in 2001.
The refunding element garnered net present-value savings of 12.29%, or $9.15 million, being taken over the life of existing maturities.
“We think distribution is more efficient when managers have incentives to compete for a sale and the city wanted that competition in place,” said Ford, whose firm developed the strategy as a result of a retail pricing methodology that evolved in recent years.
Ford acknowledged that other factors made the deal attractive. Those included historic low interest rates, a light sales calendar, and a highly rated essential-services credit.
The bonds were rated AA-plus by Fitch Ratings and Standard & Poor’s and an equivalent Aa1 by Moody’s Investors Service.
Standard & Poor’s rating was an upgrade from AA and reflected “a trend of strong coverage and liquidity levels, coupled with a very modest capital improvement program and a favorable debt-service schedule,” the agency said.
Tampa now has $275.1 million of outstanding water and sewer bonds.
The selling strategy made sense, according to Sonya Little, a former financial advisor who left Public Resources Advisory Group earlier this year to become Tampa’s chief financial officer.
“I think the structure rewards firms that really do step up to the plate and deliver orders, so it was appealing to me when it was proposed,” she said. “Based on the orders, the deserving firm was awarded the co-senior managing position.”
Little also credited the underwriters for their pre-marketing efforts and recommendations about when to bring the deal to market.
She agreed that the transaction benefited from market conditions and low rates, which enabled the city to shorten the offering from 30 years to 20 years.
“Because of the shape of the yield curve we were able to shorten it to a 20-year transaction and therefore push principal into earlier years, saving tens of millions of dollars in interest costs over the life of the bonds,” she said, adding that was accomplished with nearly the same maximum annual debt service that had been anticipated with 30-year maturities.
Little said she would consider using the competitive selection process for co-senior manager in the future.
Ford said the selling strategy worked with Tampa’s deal because it was a sizeable transaction with large maturities and the underwriters had good retail sales desks.
“We’ve been looking for the right transaction for a couple of years and this one had all the structure and size elements to make this feasible,” he said. “I think we will see other [issuers] adopt this.”