LOS ANGELES — The advantages a hot municipal bond market creates for issuers were on display this week when the Los Angeles County Metropolitan Transportation Authority priced a refunding deal.
A Citi-led syndicate beat seven other bidders chasing the competitive pricing of the authority's $86.6 million of sales tax revenue bonds.
Current market conditions are good for competitive bond sales, according to Peter Block, a managing director at Ramirez & Co., Inc., who said the municipal bond market is on fire.
The bonds, backed by the authority's Proposition C sales tax, carried ratings of AA-plus from S&P Global Ratings and Aa2 from Moody's Investors Service.
LACMTA, better known as LA Metro, obviously felt it would get a better true interest cost in the competitive market versus the negotiated market, Block said.
He was commenting ahead of the sale. Ramirez & Co. was one of 12 co-managers in Citi's winning syndicate.
Metro has long had a policy of selling sales tax-backed bonds competitively, but also has the flexibility to sell the bonds in a negotiated deal, said David Brodsly, a KNN Public Finance managing director, and Metro's financial advisor on the sale.
"The debt policy favors competitive, but we did do a negotiated sale last year that was a more complicated credit," Brodsly said. "We have that flexibility, but when you are dealing with sales tax bonds – that is a good candidate for competitive."
LA Metro did about $2 million better than expected going into the sale, Brodsly said.
"Some of it is outperforming the market – and some it is small mechanics in how the numbers get generated," Brodsly said. "But, obviously it is great results."
The eight bids were within five basis points top to bottom, Brodsly said.
"The results were significantly better than numbers we had been planning around," he said.
The transportation authority achieved present value savings of $17.25 million or the equivalent of 15.3% of the refunded par amount on the sale, Brodsly said.
"The deal priced extremely well for LACMTA, as would be expected for a high-quality obligor selling into this market with all maturities through 2024 pricing at or through the Municipal Market Data scale," said Thomas Schuette, a partner and co-heard of portfolio management at Gurtin Fixed Income.
The true interest cost for the deal was 1.934%, which goes out to 2030, according to Thomson Reuters. The yield at the 2030 long end, with a 2026 call date, was 2.24%.
Metro has primarily been selling refunding bonds in recent years. Its last new money sale was in 2013 for a Proposition C lien. It has sold short-term bonds that could be taken out with long-term bonds.
Metro is supported with three separate sales tax measures, approved by voters in 1980, 1998, and 2008. Much of the revenue from 2008's Measure R sales tax has gone to service federal Transportation Infrastructure Finance and Innovation Act loans, which have low interest rates.
"The larger share of borrowing under Measure R has been through TIFIA," Brodsly said.
Metro mainly handles refundings on a current basis as opposed to doing advanced refundings.
"The results have been almost consistently double-digit savings," Brodsly said. "Several million dollars of savings buys a few new trains. They will put the savings into the capital program and into the cost of operating the largest bus system and third-largest transportation system in the country."
Metro has just under $3.6 billion in outstanding bond debt, which includes $390 million it has drawn from TIFIA loans. It said in the offering documents it has anywhere from $400 million to $1.4 billion in new money issuance planned over the next four years to fund its capital program.
"They have a couple of large projects winding down and some big ones starting up," Brodsly said.
Gurtin holds approximately $7.8 million in LACMTA debt and currently has $10.1 billion in assets under management, of which $7.6 billion is municipal bonds.
"I'm not sure why they sold competitively versus negotiated, but given the current demand for California paper coupled with LACMTA's strong name recognition and high credit quality, it's likely they believed that a competitive sale would result in the most favorable pricing for the deal," Schuette said.
Metro, which serves a 1,433-square mile territory with 9.6 million people, has been using its voter approved sales taxes and the debt they back to build new transit lines.
In March, it opened an 11-mile extension of its light rail Gold Line east from Pasadena to Azusa.
On Monday, it opened a 6.6-mile extension of its light rail Exposition Line, making it possible to take a train from downtown Los Angeles to Santa Monica for the first time since 1953.
Metro may go out for another tax measure this November.
"We do not expect the opening of the Expo Line to have much of an impact on the deal given that the bonds are not secured by the operating revenues of the system, but rather by a voter approved sales tax applied throughout Los Angeles County," Schuette said. "So investors are likely not focusing on the news about the expansion, but instead looking at the impressive and sustained rebound in sales tax revenues since the recession and the solid debt service coverage provided by the tax."
Proposition C funds are 40% discretionary and 60% for highways and related projects, said Luanne Edwards Schurtz, Metro's assistant treasurer. Measure R, which voters approved in 2008 to build out the city's rail system, names specific projects and includes highway projects as well as rail.
Investors didn't ask about the new Expo Line, but Brodsly said whenever they see a program complete a milestone, it obviously can't hurt sales.
"Because the bonds are secured by sales tax and not farebox operations, from a credit perspective, it is not that significant," he said.
Municipal bond rates are extremely low versus a historical average, Block said.
The steepness of the muni yield curve between one and 30 years is down near 180 basis points, according to a Bloomberg chart.
Investors are attracted to the U.S. bond markets due to low to negative global yields at this time; and the exceptional risk-adjusted returns of muni asset class, Block said.
The main municipal bond index has one-year risk-adjusted returns of 4.22% versus less 1% for any U.S. Treasury bucket, which explains why new money net fund inflows for munis is at a five-year high, he said.
"Plus, we have maturing principal and announced redemptions of existing bonds, much of which will be re-invested in munis," he said.
In addition to strong demand, 30-day visible new issue supply is generally anemic at about the eight-year average, he said.
"It is however, notable that dealer inventories are at a one-year high, which will absorb some demand," Block said.
