CHICAGO - Kansas City, Mo., enters the market today with $213 million of special obligation bonds that will refund insured variable-rate demand bonds issued for an arena, the first of three transactions that will reduce the city's floating-rate exposure.
JPMorgan is the senior manager and Oppenheimer & Co. is co-senior on the sale that is broken into two series, one for $196 million that is tax-exempt and another for $17 million that is taxable. Depfa First Albany Securities LLC and Valdes & Moreno Inc. are financial advisers. Kutak Rock LLP and the Hardwick Law Firm are co-bond counsel. The city sought insurance bids, but did not receive any.
Proceeds of the deal will refund the variable-rate bonds issued in 2005 to finance construction of the new 18,000-seat Sprint Center arena. The city uses voter-approved business license fees on hotel rooms and rental cars to repay the debt although an appropriation pledge backs the bonds.
The deal is one of three that city Treasurer Randall Landes' office is working on that involve the restructuring of variable-rate bonds insured by the once triple-A rated Ambac Assurance Corp. The city sold the bonds to help finance a new arena, an expansion of its convention center, and public improvements for the KC Live entertainment district that all were part of a massive rejuvenation of the city's downtown.
Since the insurer lost its AAA from Fitch Ratings in January, interest rates on the debt shot up by as much as 300 basis points during the weekly remarketings. In a report received last week with the latest remarketing figures, the bonds received an interest rate of 4%, about 140 basis points over index rates. Some portion is also now being held by the liquidity bank.
Amid warnings from rating agencies over the city's floating rate exposure, Landes said it was always the city's intention to restructure its debt portfolio once the projects were completed.
"While we always planned to reshape our portfolio with regard to the mix of fixed- and floating-rate debt, the insurance credit crisis accelerated our plans," he said.
The city opted for a floating rate initially on the projects because it provided flexibility as the final costs of the projects were determined and allowed the city to capture the benefits of the lower rates on the short end of the yield curve, at least until earlier this year. Once the three deals are completed, the city's debt portfolio will include 79% at a fixed-rate, 5% synthetically fixed, and 16% unhedged variable-rate, compared to 64%, 16%, and 20%, respectively.
Ambac has been downgraded to AA by Standard & Poor's which has it on negative watch while Moody's Investors Service downgraded the company' backing to Aa3 with a negative outlook. Fitch withdrew its rating late last month at Ambac's request.
Ahead of the sale, rating agencies affirmed the city's general obligation and special obligation credits.
Fitch rates the city's $308 million of GOs AAA and the city's $1.2 billion of special obligation bonds backed by an appropriation or lease AA while Standard & Poor's rates the debt AA, and AA-minus, respectively and Moody's assigns a Aa3, and A2 rating, respectively. Fitch and Moody's both assign the credits a negative outlook.
Moody's attributes the negative outlook to the city's significant insured variable rate demand obligation exposure that's resulted in increased interest costs and which poses a potential liquidity drain in addition to the city's economic challenges, modest liquidity levels, and a structural budget imbalance. Fitch cited the city's reduced financial flexibility as its general fund reserve levels have been falling.
The next restructuring is a $180 million refunding of KC Live bonds. The city will again use a variable-rate structure but with a letter of credit provided by Depfa. The new structure will cost the city about 30 additional basis points annually for the two-year LOC but will save the city significant costs overall because it is expected that the interest rate on the VRDOs will return to a level more in line with the Securities Industry and Financial Markets Association index. Oppenheimer and Stern Brothers are underwriters on the deal.
Kansas City will refund another $100 million of variable-rate bonds issued as part of its expansion of the H. Roe Bartle Hall Convention Center. Dexia Credit Local will provide a direct pay letter of credit for $20 million and Bank of America will provide a LOC for an $80 million series. Citi is underwriter.