SAN FRANCISCO — The Los Angeles Harbor Department plans to sell $200 million of new-money bonds and up to $550 million of refunding debt next week.
The port, the busiest in the U.S. by container traffic, has issued an optional tender notice for $550 million of bonds that pay interest subject to the federal alternative minimum tax in order to refund them as fully tax-exempt bonds under the American Recovery and Reinvestment Act.
The stimulus act exempted all tax-exempt bonds issued in 2009 and 2010 from the AMT and allowed issuers to refund AMT debt issued within the last five years. Since AMT bonds can’t be advance refunded, the Harbor Department and other issuers are using optional tenders to buy the bonds, which were issued in 2005 and 2006, from investors.
Lambert St. Louis International Airport in Missouri will also be in the market next week with optional tender and refunding for AMT bonds. The Idaho Housing and Finance Association earlier this month said it’s trying to buy back and refund $388 million of fixed-rate single-family mortgage revenue bonds that are subject to the AMT.
Yields on AMT debt surged when the financial crisis deepened in the wake of Lehman Brothers Holdings Inc.’s bankruptcy last September. While tax-exempt municipal bond yields have fallen sharply this year, AMT bond yields remain elevated relative to fully tax-exempt debt.
Mark Young, a principal at Gardner, Underwood & Bacon LLC, the port’s financial adviser, estimates that the AMT penalty is currently 75 to 150 basis points for the Los Angeles port’s debt, depending on the maturity, up from about 40 basis points before the financial crisis.
“AMT bonds are trading at a fairly large discount,” said Harbor Department chief financial officer Karl Pan.
Elevated yields and a lack of liquidity in the AMT market mean investors who hold the debt may be stuck sitting on losses and may be willing to sell the bonds back to the port.
“We’re willing to pay a little premium” to current market prices, Pan said. “We want to make it worth their while.”
Since the debt is trading at a discount to par and can now be refunded with cheaper tax-exempt bonds, the port can save money even after paying a premium to redeem the outstanding debt.
Young said that should be enticing to institutional holders who have to mark their bonds to market daily and have recognized the loss of market value for the debt.
“It’s an unrealized loss,” Young said. “But for an investor like a mutual fund, whose holdings are marked to market each day, the net asset value of their portfolio has reflected this significant widening” in AMT spreads.
“There may be a mutual opportunity here for an existing bondholder to realize some value above where the bonds are currently trading, and the port may be a willing buyer at a spread to the market price because it makes economic sense for them,” he said. “With a 75 to 150 basis point spread, I think there’s room for both sides to benefit.”
De La Rosa & Co. and Goldman, Sachs & Co. are running the tender offer, and the port has hired Bondholder Communications Group to help them find its investors.
So far, they have identified about 75% of the major holders, according to Young. He said the bulk of the debt is held by a fairly small group of institutional investors because retail muni bond investors have traditionally had little interest in AMT debt.
Still, it takes some effort to reach investors directly because many bonds are held in accounts at brokerages or banks, and not listed under the actual owner’ names.
The port issued its tender notice on June 5. Issuers have until Tuesday to tell the port if they would like to tender their bonds. The port will choose which offers to accept via a modified Dutch auction. Holders may choose to submit a price at which they would be willing to sell their bonds or accept the determined clearing price for their maturity.
The clearing price is the highest price the port is willing to pay for each maturity of bonds. Investors who offered their bonds at less than the clearing price will get the higher price. Investors who offered their bonds for more than the clearing price will keep their bonds.
The port is unsure how much it will get back from investors. Young said he would be happy if the port could get even half of the bonds back. It will finance the purchases with matching maturities of fixed-rate tax-exempt bonds. De La Rosa is the book-runner on the refunding bonds, which will be sold as Series C, and Goldman Sachs is the co-senior manager.
Sidley Austin LLP is bond counsel on the transaction, and Quateman LLP is disclosure counsel.
JPMorgan is book-runner on the $200 million of new-money bonds, and Loop Capital Markets is co-senior manager. The new-money deal will be structured as 30-year, fixed-rate bonds and will be split in two series, A and B, to keep the private-activity bonds and governmental debt in separate series, allowing them to be refunded separately in the future.
“By putting them into different series and keeping them distinct, it will allow us, if interest rates go down in the future, to take advantage of an advance refunding of the governmental debt,” Young said.
The dealers will take retail orders for all three series on Wednesday and do institutional pricing on Thursday.
Both the refunding and new-money bonds are backed by harbor revenues. The Los Angeles port maintained its Aa2 rating from Moody’s Investors Service and its AA ratings from Standard & Poor’s and Fitch Ratings, despite a sharp slowdown in U.S. port traffic this year.
The global recession has weighed heavily on trade volumes. U.S. imports and exports of goods fell 28% to $822.8 billion in the first four months of this year, according to the Bureau of Economic Analysis. Container traffic at the Port of Los Angeles fell 16% in the first five months of the year, according to the Harbor Department Web site.
The port has been hurt by a decline in consumer spending in the U.S., Pan said. It is the main port of entry for U.S. imports from China, which are largely consumer goods. The port did see a gain in export shipments in May.
The port has had to cut some fees to maintain shipping volumes, but it has also reduced operating spending and slowed its capital spending. It entered the recession with a strong liquidity position, built up over the years when U.S. trade with China boomed. It had 735 unrestricted days’ cash on hand at the end of March, according to Standard & Poor’s, and the number swells to 964 days if the port’s $235 million of emergency reserves are included.
Standard & Poor’s said the port’s debt service coverage ratio is projected to fall to a “solid” 2.7 times this fiscal year from a “strong” 3.9 times in fiscal 2009.
“These bonds are rated among the highest of all transportation-related bonds that Standard & Poor’s rates,” the agency said in a report. “The ratings are based on our view of the port’s continued very strong business position, stable portfolio of assets, and excellent historical financial performance.”
