Philadelphia tomorrow will begin to sell about $535 million of bonds in a sale to be completed in the coming weeks in two parts.
The city tomorrow will sell about $218 million of fixed-rate bonds, and it will also execute a SIFMA swap, which is directly tied to its variable-rate bonds. Then on or near Dec. 20, the closing date, Philadelphia will sell $317 million of variable-rate bonds prior to closing the deal, according to city officials.
The purpose of the refunding is to achieve debt service savings, city officials said. The current market indicates that Philadelphia would achieve a present value savings of about $25 million, according to city officials. While the city planned to execute this transaction before the end of the year, the reason for doing it now is the favorable interest rates, officials said.
RBC Capital Markets is the leader underwriter for both the fixed- and variable-rate deals. Royal Bank of Canada will serve as the swap counterparty. Additionally, co-senior managers for both the fixed- and variable-rate deals are Popular Securities Inc. and Wachovia Bank NA. Co-managers for the fixed-rate portion are Banc of America Securities LLC, Cabrera Capital Markets LLC, PNC Capital Markets LLC, and UBS Securities LLC.
Public Financial Management Inc. and Phoenix Capital Partners are financial advisers for the deal. Blank Rome LLP and Boothe & Tucker LLP are co-bond counsel.
While Financial Security Assurance Inc. will insure the deal, Fitch Ratings assigns the bonds an underlying rating of BBB-plus, Moody’s Investors Service rates the bonds Baa1, and Standard & Poor’s gives it a BBB rating.
“An FSA wrap carries some weight in this market, given their relatively low level of risky [collateralized debt obligation] exposure,” said Adam Weigold, who manages four Pennsylvania municipal bond funds as vice president and portfolio manager at Eaton Vance. “FSA is generally perceived to have a fairly clean insured book.”However, Weigold noted: “Buyers who are looking through the insurance to the underlying credit may not be as attracted to this deal, given Philadelphia’s weak credit profile.”
While the city has seen operating budget surpluses for the last three years, rating agencies still see some challenges.
“The city has a high debt burden, and a very high fixed-cost burden on the general fund,” said Fitch associate director Christopher Hessenthaler. Philadelphia’s overall debt burden remains “very high” at $4,729 per capita and 17.8% of taxable market value, according to Fitch. The city has about $1.2 billion of outstanding GO debt.
After positive general fund operations in fiscal 2005 and 2006, fiscal 2007 unaudited results show a $297.8 million budgetary basis general fund surplus, which was driven by stronger-than-expected growth in wage and business privilege tax receipts, according to Fitch.
However, the city’s five-year plan — which was approved by the city’s state-appointed oversight board, the Pennsylvania Intergovernmental Cooperation Authority — anticipates a decline in the budgetary basis fund balance to $127.7 million by the close of fiscal 2012.
Also, with a new administration coming in January when Mayor-elect Michael Nutter takes office, the five-year plan will be redone.
“We expect to see a change in the five-year financial plan they turn into PICA,” Hessenthaler said.
Nutter recently named Robert Dubow, PICA’s executive director, as finance director for the incoming administration and last week named a former city treasurer and municipal investment banker, Clarence Armbrister, most recently Temple University executive vice president and chief operating officer, as his chief of staff.
Fitch senior director Jessalynn K. Moro said,: “It’s really going to be interesting to see what the new multi-year plan might look like and how they may or may not be able to sustain their positive financial results.”
Moody’s vice president and senior analyst Geordie Thompson also noted that Philadelphia will engage in labor negotiations with police and fire personnel in the spring, which may cause financial challenges for the city.