The Los Angeles County Metropolitan Transportation Authority board of directors approved plans last Thursday to issue $250 million of bonds.
The deal will include $150 million of refunding bonds and $100 million of new money.
The Metro board also approved Stone & Youngberg as lead underwriter.
The agency plans to execute the sale in October, but the timing will depend partly on how the market reacts to the Federal Reserve’s announcement last week that it will target longer-term bonds for future purchases, according to Terry Matsumoto, Metro’s chief financial officer.
The CFO called the central bank’s plans “the key unknown in setting a date,” because it’s hard to gauge what longer-term impact any Fed action will have on the bond markets.
Interest rates plunged in an initial reaction to the Fed’s “Operation Twist.”
In an effort to reduce long-term interest rates, Fed chairman Ben Bernanke plans to shift the central bank’s $2.65 trillion securities portfolio so it will have more long-term Treasury bonds and more mortgage debt. Central bank officials called the move a “twist” away from what the Fed has been doing for the past year. The Fed had been reinvesting money into Treasury bonds and shrinking its mortgage portfolio.
The Fed’s announcement caused a massive sell-off in stocks on Thursday and poured fuel on an unprecedented bond rally, driving the 10-year Treasury yield down to 1.86%.
The Metro financial staff had deemed it a good time for a refunding even before the Fed action as low tax-exempt interest rates provide the opportunity to refund the bonds and generate significant debt service savings, Matsumoto said. Outstanding commercial paper can be fixed-rate financed at current low interest rates and free up borrowing capacity, he said.
The board approved a negotiated sale at their June 23 meeting and asked that all underwriters be California-based and “emerging” firms defined as having net capital less than $50 million.
Stone & Youngberg was selected as book-running senior manager based on the recommendation from Metro staffers even though the San Francisco-based firm has announced plans to merge with Missouri-based Stifel Financial on Oct. 1.
Stone & Youngberg qualifies as both California-headquartered and emerging as of the request for proposals submission date and will qualify as of the Sept. 22 board meeting, according to the Metro staff report.
De La Rosa & Co. and Siebert Brandford Shank & Co. were selected as co-senior managers, with Backstrom McCarley Berry & Co., Greencoast Capital Partners, and Prager, Sealy & Co. as co-managers.
The plan is to refund up to $165 million and to lock in present-value interest savings of approximately $16 million, the report states.
Metro has $300 billion of projects included in its 30-year long-range plan. Los Angeles County voters approved an additional half-cent sales tax through Measure R in 2008 to enable the county to move forward on the plan, which includes 10 light-rail and subway projects designed to create a rail network connecting the county’s vast area.
Proceeds from the sale will be used to refund bonds backed by a different half-cent sales tax voters approved in 1980.
Metro isn’t likely to execute any further new issuances over the next few years because it was able to issue $750 million of taxable Build America Bonds last fall, Matsumoto said.
“I expect that will put us in good stead for another year, or two, or three,” Matsumoto said.
Agency officials also are still hoping that the proposed qualified transportation infrastructure bond program will come to fruition.
California legislators have been lobbying for the program, which would provide interest-free borrowing from the federal government. Los Angeles’ piece of the pie would be $6 billion.
The money would be used to partially fund plans for a connector line in downtown Los Angeles and a proposed Westside subway from Hollywood to Brentwood, said Raffi Hamparian, Metro’s government relations manager.
Without the federal funding, the Westside subway could take a decade, rather than three years, to construct, and the project would have to be split into three stages, Hamparian said.