New York City this week will price roughly $1.4 billion of general obligation debt, including $616 million of taxable Build America Bonds, to help finance capital improvements.
Along with the new-money issuance, the city will refund about $700 million of debt to generate present-value savings.
JPMorgan yesterday kicked off a retail order period for the Series 2009D-1 BABs, to be followed by institutional pricing on Thursday. Both the BABs and $83.8 million of taxable Series 2009D-2 bonds — which will competitively price tomorrow — offer serial maturities from 2011 through 2022 and three term bonds, according to the preliminary official statement.
Alan Anders, the city’s deputy director for finance, said there will be a net savings from issuing BABs instead of traditional tax-exempt securities, although officials have not quantified an exact amount.
With BABs, issuers receive a 35% federal subsidy on the interest costs. The double-A rated city anticipates strong demand from the taxable market.
“The [BAB] market seems to be diversifying,” Anders said. “The core is life insurance companies, but there are unit investment trusts, and over time I think there will be others.”
On Friday, Citi began a three-day retail order period on $700 million of tax-exempt Series 2009E and Series 2009F refunding bonds.
Institutional pricing will begin tomorrow. The refunding will offer serial maturities from 2010 through 2026, according to the POS.
The city received approximately 277 retail orders on Friday, Anders said. He declined to say how much savings officials anticipate receiving from the refunding, but said the city has a net present-value savings threshold of 3%.
New York City has roughly $39 billion of outstanding GO debt. Fitch Ratings and Standard & Poor’s rate the deals AA-minus and AA, respectively. Moody’s Investors Service assigns a Aa3 to the city.
The financial industry helps fuel New York City’s economy, with 12% of local employment and 32% of earnings coming from the sector, according to Fitch.
“One of the big uncertainties for New York City, obviously, is financial services ... the way in terms of just general employment and activity in the industry and also, long term, if there’s to be a fundamental change in the way that industry is compensated or not,” said Fitch analyst Laura Porter.
Another challenge for the city is its heavy per-capita debt load of $7,760, according to city Comptroller William Thompson.
“New York City’s debt burden is on pace to become unaffordable as our economy suffers the impacts of a severe global, national, and local economic downturn,” Thompson said. “Once again, New York ranks above its peers in the amount of debt shouldered by city residents and the city’s economy, with each resident signifying a debt load of $7,760 per person.”
The city will pay $5.16 billion in debt service in fiscal 2010, with that amount estimated to increase to $6.35 billion in fiscal 2013, according to the comptroller’s annual report on capital debt and obligations. Thompson released the report on Dec. 1.
Debt service is the fastest growing budget item for the city, according to a Moody’s report, with principal and interest costs increasing by more than 7% per year between fiscal years 2010 and 2013. Debt service is projected to account for 14.5% of tax revenue in fiscal 2010 and increase to 15.6% in fiscal 2013, Moody’s said.
New York City director of investor relations Raymond Orlando declined to discuss the city’s debt service levels.