New York City's cautious strategy in the face of the market turbulence that dictated smaller deals at the end of last year has given way to a new confidence as it readies a $600 million bond offering for school construction.
When the city markets its Transitional Finance Authority building aid revenue bonds, or BARBs, on Monday with a two-day retail order period to be succeeded by institutional pricing on Wednesday, the size of the deal will already be $200 million greater than appeared on a preliminary second-quarter debt issuance calendar put out by the state comptroller's office.
"The market has continued to improve - our GO last week went great," said deputy comptroller for public finance Carol Kostik.
Last week the city sold $800 million of general obligation bonds that yielded 4.97% on a 2036 maturity with a 5% coupon, which was 65 basis points higher than the triple-A GO scale according to Municipal Market Data.
"We are just being less conservative with what we go out with because of market improvements. We are finding more strong and consistent investor demand so that we are more comfortable counting on getting a large deal done," Kostik said.
At the depth of the credit crunch and as arbitrage fund investments fell sharply, the city went out with smaller deals, focused on retail investors, and upsized deals in response to demand.
Market psychology has changed since then, said Evan Rourke, portfolio manager at Eaton Vance.
"At the end of last year you were sitting there going, 'Who's going to buy all these bonds?' " Rourke said. "The market hasn't really normalized, but it's gone from 'Where is the demand going to come from?' to 'Where's the supply going to come from now?' because so much [taxable Build America Bond] issuance seems to be taking bonds out of the tax-exempt part of the market."
The city's approach has been proactive, Rourke said, and it is "realizing that now is a reasonable time to strike and take advantage of the expectation that we may have less supply over the year and institutional investors are more willing to commit capital now than they were before."
Citi will be the book-running senior manager on the fixed-rate deal. Goldman, Sachs & Co. will co-senior manage the sale, and Sidley Austin LLP is bond counsel. Public Resources Advisory Group and A.C. Advisory Inc. are financial advisers on the deal.
The deal's structure has not been finalized, but Kostik said it will probably be serials and terms with maturities out to 30 years.
The TFA has sold $1.05 billion of BARBs so far this year, according to Thomson Reuters. It has sold $3.67 billion of BARBs since its first issuance under the program in 2006, according to Thomson Reuters. The state has authorized the TFA to issue up to $9.4 billion of BARBs, which are backed by state building aid.
Standard & Poor's rates the credit AA-minus.
"A strong feature is, the flow of building aid is directed directly to the trustee, and that's under statute," said Standard & Poor's analyst Karl Jacob. "New York State's had a good commitment to fund education, so there's been a pretty good flow of revenue."
Fitch Ratings assigns an A-plus with a stable outlook, and Moody's Investors Service rates the credit A1.
