The second largest deal out of New York this year is expected to come to market the week of Aug. 6 with $1.2 billion of combined new money and refunding bonds.
The New York City Transitional Finance Authority, an instrumentality of the state, is planning to sell future tax-secured bonds on Wednesday. About $350 million of the bonds will be offered competitively; the negotiated $850 million portion will price for institutions after a two-day retail order period that begins Monday.
The competitive sale will include $150 million of taxable qualified school construction bonds and $200 million of conventional taxable bonds.
The negotiated sale is all tax-exempt and consists of $750 million of refunding bonds and $100 million of new-money debt bonds. All of the bonds will be secured by future personal income tax and sales tax revenues.
Because of its size, expected triple-A ratings, and current market conditions, the deal is expected to meet strong demand.
"There's always demand for triple-A bonds," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management. "I would think in this environment there's probably more demand for bonds that offer more spread, but there's going to be a fair amount of money out there looking to be put to work, so this is an issue that should be well received."
The volume of refundings this year through July is up 135% from the same period last year, according to Thomson Reuters data.
This week's deal will add $750 million of refunding to that volume, but the remaining $450 million of bonds is new money, with proceeds expected to go toward funding a wide range of costs in New York City's capital finance as well as projects for public schools.
Scott Sieber, a spokesman for NYC Comptroller John Liu, said the amount of savings the city will receive from the refunding bonds will depend on market conditions at the time of sale.
"We continuously monitor our portfolio of outstanding bonds for opportunities to efficiently refinance at lower rates," Sieber said. New York, its local governments and agencies, have issued $28.7 billion of total debt this year, the largest amount issued by any state so far.
"Right now, the market still seems to want New York paper, and national investors are certainly buying New York paper, so there's still a very good demand," said Pietronico. "This deal will also see national investors because of its size."
BofA Merrill Lynch will lead the underwriters for the negotiated portion, with Barclays Capital, Citigroup, Goldman, Sachs & Co., JPMorgan, and Morgan Stanley serving as co-senior managers.
Bond counsel is Sidley Austin LLP and financial advisors are Public Resources Advisory Group and Public Financial Management.
Maturities will range from 2013 to 2034. The QSCBs, taxable debt for which the issuer receives a federal subsidy, will mature in 2034.
The longer maturities are likely to attract intermediate mutual funds, said Chris Ryon, a portfolio manager at Thornburg Investment Management.
"The intermediate portion of the yield curve in this market is typically the most attractive when you compare it to the long end because you get larger increments of income per units of risk, which would be duration," Ryon said. "But you could have long term mutual funds looking to maximize income by the long ones."
In addition to mutual funds, the deal will likely attract risk-averse investors, specialty state investors from New York, and specialty mutual funds, Ryon said, though it really depends on how the deal prices.
"TFA's earlier deals were priced at a larger spread to triple-A, making them more attractive to the national market. Subsequent deals have priced at narrower spreads, making them less attractive to national investors," Ryon said.
Despite the narrowing spreads, the TFA deals have been placed very well, he added.
The TFA's last sale of future tax-secured bonds in June saw yields ranging from 0.37% in 2014 to 3.41% in 2035. Bonds maturing in 2039 had a 3.58% yield.
The five-year bonds had a spread of five basis points above Municipal Market Data's triple-A benchmark scale and the 20-year bonds had a spread of 34 basis points above the scale.
Five-year bonds from a previous sale in April had a wider spread at 17 basis points above the scale, and for the 20-year bonds, 39 basis points above the scale.
In a November 2011 deal, 20-year bonds had an even wider spread of 48 basis points above the scale.
The bonds were rated AAA by both Standard & Poor's and Fitch Ratings, and Aa1 by Moody's Investors Service.
Standard & Poor's has confirmed its AAA rating for the new bonds, citing a strong bond structure, the city's diverse economy, the authority's cash flows and coverage, and the sales and income tax revenue that supports the bonds' "resilient nature."
"Although this revenue stream is susceptible to economic slowdowns, it has generally, as evidenced by recent decreases, been quick to recover," analysts said in a report.
Since the adoption of the PIT in 1966, revenues have risen from $130 million to $7.6 billion in fiscal year 2011. Revenues for fiscal year 2012 are projected to be approximately $8 billion.
Sales tax revenues will be available for the payment of the future tax-secured bonds if personal income tax revenues are projected to be insufficient to provide at least 150% of the maximum annual debt service on the authority's outstanding bonds.
Sales tax revenues for 2011 totaled $5.6 billion and are projected to be approximately $5.9 billion in 2012. Sales tax is imposed on most categories of property and services at a rate of 4.5%.
Neither tax revenue payment stream is subject to city or state appropriation.
The report from Standard & Poor's also cited the authority's cash flows and coverage, which are strong and more than sufficient to make timely interest and principal payments under severe stress requirements.
"We believe coverage will likely remain, in our view, strong despite additional planned debt issuance. Furthermore, we believe the city's substantial and diverse economy will likely continue to support pledged revenue growth," said analyst Nicole Ridberg.
Due to these factors, a change in outlook — currently stable — is not expected in the next two years. With projected tax revenues for 2012 totaling $13.9 billion, the debt service coverage is projected to be 8.39 times.
Fitch has also affirmed its AAA rating, citing strong legal framework, statutory cash flow provisions, robust coverage, and manageable debt plans, which include approximately $10.6 billion in additional future tax-secured bonds in the next five years. Moody's affirmed its Aa1 rating.
A portion of this week's debt sale includes around $150 million of taxable QSCBs, which are part of a bond program created by the American Recovery and Reinvestment Act of 2009.
Under the act, bonds can be issued as tax-credit bonds or taxable direct payment bonds, similar to Build America Bonds.
The TFA will issue the QSCBs as direct-payment bonds and will receive federal interest rate subsidy payments from the U.S. Treasury, which will be used for education capital purposes only.
The other portion of taxable bonds being issued will finance city capital expenditures that are not eligible for tax-exempt financing, Sieber said.
Toward the end of the month the TFA is also planning to sell $350 million of variable rate bonds. The proceeds will be used for the same purposes as the fixed rate tax-exempt bonds being offered this week.
"The city's policy is to diversify its debt portfolio and achieve lower interest rates by including variable debt in its debt structure," Sieber said.
Further details on the variable-rate bonds will be available closer to the sale date, he said.