CHICAGO - Oshkosh, Wis., will take taxable and tax-exempt bids today on two separate tranches of general obligation debt totaling $20 million - marking the second competitive transaction of its kind by an issuer looking for a side-by-side comparison of the value of the Build America Bond subsidy.
The transaction includes a Series A of $16.7 million of corporate purpose GOs that mature serially between 2010 and 2028 and are callable beginning in 2019. The winning bidder can seek to convert the latter maturities to term bonds. The Series B is for $2.9 million of GO corporate purpose notes that mature between 2010 and 2018 with a call in 2017.
Springsted Inc. is the financial adviser and Chapman and Cutler LLP is bond counsel. The bonds are rated Aa3 by Moody's Investors Service and bids will be accepted by Springsted via fax or electronically through Ipreo's PARITY system.
Potential bidders can submit either a taxable or tax-exempt bid or both. If the taxable bids are lower than the low tax-exempt bids after the direct-pay 35% government subsidy on interest offered under the federal government's BAB program is factored into the interest costs, the city will declare the debt BAB bonds.
The bidding plan resembles the process followed by De Pere, Wis., a week earlier on its $2.7 million deal, although De Pere combined its two tranches of bonds and notes for bidding purposes while Oshkosh will take separate bids.
Market participants said it will be interesting to see the bidding results and the spreads between tax-exempt and taxable given the flood of large BAB issues last week that have brought down yields on the long end.
The De Pere deal, which carried the same Moody's rating and traditional call features as does the Oshkosh transaction, attracted six bids. Most of the issuers on the larger negotiated BAB transactions of last week opted to forgo a traditional municipal call in favor of make-whole provisions that limit refunding opportunities but are standard in the corporate market.
BMO Capital Markets won the deal after submitting a taxable bid with a true interest cost of 5.00% that with the federal applied was 3.2887 %. Cronin & Co. submitted the next best bid at a taxable true interest cost rate of 5.70% that with the subsidy applied equaled a tax-exempt rate of 3.76 %. Cronin was the only bidder to submit both a taxable and tax-exempt bid. Its tax-exempt bid was 4.07%.
"The results were very interesting in that the deal worked. When you try something new you can do all your homework, but you don't know for sure how it will work until the bidding is done, and this worked," said Kathleen Aho, president of Springsted.
Aho said one interesting result was Cronin's submission of both a taxable and tax-exempt bid. "We wondered whether bidders would want to do the work necessary to submit both types of bids," she explained.
The advisory firm has seen keen interest among its issuing clients in the BAB program and is working on several potential transactions that would be sold competitively. Aho said some local government officials however remain concerned over the long-term stability of the interest subsidies.
"The discussion is will the subsidy stay in place or will Congress or the government change it. That is bothersome to some and nothing we say can make that concern go away," she said.
The firm's advisers point to comments from Treasury and congressional officials that the law treats the interest subsidy payments like a tax refund, and that they should be likened to an ongoing permanent appropriation. They also note the growing ranks of politically powerful issuers that have now issued BABs. For conservative issuers, inclusion of a traditional municipal call feature can calm some worries as it preserves future flexibility.
Ahead of the sale, Moody's affirmed the city's Aa3 rating on $110 million of debt. Proceeds of today's sale will finance various capital projects.