LOS ANGELES — Morgan Hill, Calif., is refinancing its redevelopment debt after waiting months for a court judgment that would strengthen the structure of its bonds.
The Santa Clara County city, acting as a successor agency to its former redevelopment agency, is planning to sell $88 million of tax allocation bonds to refund all of the agency's outstanding variable rate 2008 bonds.
Faced with concerns surrounding the wind-down of redevelopment agencies, which were dissolved by the state last year, the agency has implemented several enhancements to the bonds in an attempt to entice investors and lower interest rates.
One important enhancement was obtaining a validation judgment from the Sacramento Superior Court.
"Given the large size and long, 20-year term to maturity of this bond issue, we decided to tweak the bond structure in order to make the bonds more appealing to investors," said Steven Gortler, the successor agency's financial advisor. "From the agency's perspective, anything we can do, within reason, to lower the interest rate on the bonds is worthwhile, since every basis point we save lowers our total interest expense by more than $100,000 over the life of the bonds."
The deal, expected to price on Tuesday, has been in the works since before June as the agency faced an Aug. 21 expiration date on the letter of credit from Scotiabank that backed the bonds.
The bank said it did not intend to renew the LOC, and, due to the dissolution of redevelopment agencies, no banks were offering to provide a substitute LOC for the bonds, Gortler said.
As the city waited to receive the court judgment, which was being delayed due to a backlog of civil litigation in the court, it had to extend its LOC to Feb. 21, 2014 — the last extension the bank said it would grant.
The validation judgment establishes the primacy of the statutory lien on the pledged tax revenues in favor of bondholders.
Gortler said that by validating the security for the bonds, investors will be fully protected if either the courts or the state legislature change the law in a manner that impairs the lien on pledged tax revenues, or if any governmental entity asserts a right to the revenues ahead of bondholders.
"In the aftermath of dissolution, we believe there are investors who remain uneasy about the legal protections accorded holders of tax allocation bonds, especially with respect to California State Law," Gortler said. "Validation should ease their concerns."
After the shutdown of redevelopment in early 2012, the wind-down process has been complex, prompting concerns about debt service payments and causing general confusion over the use of bond proceeds. As a result, many RDA bonds have been downgraded and several lawsuits have been filed against the state.
According to Fitch Ratings, which rates Morgan Hill's new tax allocation bonds AA-minus with a stable outlook, the agency appears to be in compliance with dissolution legislation and the process does not pose a material credit risk to the new bonds.
Standard & Poor's also assigns the bonds a AA-minus rating and stable outlook — relatively high marks for tax allocation bonds.
A recent report from Moody's Investors Service found that the average rating it has given to successor agencies is Ba1, with only 19% of the ratings an investment-grade Baa3 or higher.
Moody's did not rate Morgan Hill's refunding bonds.
Standard & Poor's and Fitch analysts cited as credit strengths the strong debt service coverage on the bonds, the diverse tax base, and the strong legal structure.
Morgan Hill is about 70 miles south of San Francisco and 20 miles south of San Jose, with a population of about 38,000.
The agency is using a tri-party indenture, which will include covenants with the Santa Clara County Auditor-Controller to remit the pledged tax revenues directly to the trustee every Jan. 2 to ensure they are not used for other enforceable obligations or released to other local taxing entities until after the full payment is made.
The agency has also subordinated all of its statutory pass-through payments to the refunding bonds and closed the lien, which means the agency may not issue any parity debt.
In addition to tweaking the bond structure, Gortler said the agency has also increased the timeliness and utility of its disclosure requirements in order to address the difficulty of monitoring tax allocation bonds in the aftermath of RDA dissolution.
"Between all the enhancements we made to the bond structure, and the strong AA-minus ratings from S&P and Fitch, we expect a lot of interest from investors," Gortler said. "That being said, it's hard to predict how well the bonds will price, since there are no other bonds just like these."
Morgan Stanley will price the deal, which consists of $73.1 million of tax-exempt bonds and $15.3 million of taxable bonds. The tax-exempt bonds will mature in 2018 through 2033, and the taxable bonds will mature in 2014 through 2018.
Fulbright & Jaworski LLP is bond counsel.