BRADENTON, Fla. — Miami prices up to $50 million of revenue bonds next week to refinance a two-year-old loan used to help pay for underwater tunnels to the Port of Miami.
Investors starved for higher yields will be interested in this sale, but only qualified investors can partake in the limited public offering.
With two federal agencies making inquiries into Miami’s finance practices, buyers must be sophisticated municipal market professionals capable of evaluating investment risks.
The investment-grade bonds, which are expected to be structured with several, 18-year term maturities paying interest only in the first three years, will only be sold to about 35 institutional investors by Wells Fargo Securities.
Pricing is expected to begin Monday.
It is Miami’s first venture into the bond market since the Securities and Exchange Commission opened a second investigation into bonds previously issued by the city, and after the Internal Revenue Service began a routine examination into some of the city’s debt, according to Janice Larned, chief financial officer and assistant city manager.
The use of a limited offering “is due to our special circumstances, and we wanted to make certain we limited this sale to people who understand those circumstances,” she said. “This is a simple refinancing that has gone through incredible due diligence.”
With interest rates at historic lows, the city will still get a good deal, Larned said.
Qualified bond buyers on the hunt for yield will be happy to see Miami’s deal come to market, especially because of its split ratings, according to a Florida trader. The bonds are rated A3 by Moody’s Investors Service and BBB-plus by Fitch Ratings.
While appraising the issue, Moody’s concluded a rating review of the city’s credit position, affirmed all of its ratings, and placed a negative outlook on Miami’s debt “based on the city’s continued need to control above-average fixed costs, uncertainties related to managerial turnover, and the ongoing SEC investigation.”
Fitch affirmed its ratings, including its A-minus on the city’s general obligation and special obligation non-ad valorem revenue bonds. Fitch also revised its outlook to stable from negative on the GOs and special obligation bonds.
“We are pleased that the rating agencies are bringing stability to the city’s ratings,” Larned said.
The split ratings, particularly with one that dips into the triple-B category, could cost the city 100 basis points or more, the Florida trader said, noting there are still plenty of investors on the sidelines conducting their own due diligence into Miami’s circumstances.
“They’ve got their research to do looking at what’s going on in Miami,” the trader said
The risks due to SEC and IRS inquiries into past city bond offerings are disclosed in the preliminary limited-offering memorandum.
Some of the investigations are related to the recession and severe correction in housing values, as well as budgeting decisions made by past city commissioners.
The SEC opened its first probe in December 2009, which centered on disclosures made to investors for bonds sold in 2007 and 2009.
The main issue is that the 2009 case appears to focus on whether Miami appropriately described in bond documents its financial condition, which deteriorated as the economic downturn worsened.
Earlier this year, the SEC notified the city in a so-called Wells Notice that enforcement staff would recommend filing civil fraud charges against Miami.
In coming months, city officials plan to appear before the full commission in Washington to defend against the charges and propose a settlement, according to Larned.
Miami’s position could be more difficult to defend because it already signed a cease-and-desist order in 2003 promising not to commit any further violations or future violations of securities laws.
The 2003 order reflected the city’s handling of previous budgetary problems in the 1990s. During those years, Miami failed to disclose in three bond offerings that its cash position had materially declined.
Market participants have said that they are not aware of any other issuer that violated securities laws a second time, which the SEC appears to be alleging in the investigation that began in 2009.
In July 2010, after the first SEC investigation began, Miami issued $84.5 million of tax-exempt bonds and $16.8 million of taxable bonds to finance parking garages for the new Marlins Major League Baseball stadium.
In December 2011, the commission opened a second investigation.
This time the regulatory agency focused on the Marlins parking bond sale and sought an expansive list of documents, video, and audio recordings relating to the financings, and dealings with MLB and the Marlins, including the ball club’s ability to contribute to the stadium financing.
Adding to the complexity of the city’s problems, the Internal Revenue Service in November 2011 opened a routine examination into $153.1 million of capital improvement bonds that Miami sold in 2007.
Prospective investors in next week’s sale may overlook some of the city’s problems because of the Port of Miami and the business it does daily in shipping and as the world’s busiest cruise port.
“The port is a very big part of the city and [Miami-Dade] County so I would think once they get investigating and figure out what’s gone on with the politicians, the deal is going to have to come cheap enough due to headline risk,” the Florida trader said. “But the city will still find buyers.”
Next week’s bond offering will refinance a $50 million loan with Wells Fargo, which represented a portion of Miami’s contribution toward building twin tunnels to provide new access under the water for trucks and cruise buses to the Port of Miami.
The nearly $1 billion project is more than halfway complete.
When the tunnels open they will eliminate major congestion through the streets of downtown Miami, which is currently the only access to the port.
The milestone will also mean “much more growth” for the city, according to Larned.
Despite the difficulties with the SEC and IRS, Larned said Miami has a good story to tell and the bonds being sold next week will be “a great investment” for qualified buyers.
“The city of Miami is one of the few cities in the country starting to emerge from the recession,” she said. “We have such a large international presence.”
The bonds may price over several days, Larned said. The final structure was not available at press time. Public Financial Management Inc. is the city’s financial advisor. Squire Sanders LLP is bond counsel, Bryant Miller Olive PA is disclosure counsel, and Broad and Cassel is underwriters’ counsel.