Philadelphia sees strong demand for taxable refunding

The high-demand market environment boosted Philadelphia’s first general obligation bond deal of 2020.

Philadelphia sold $118 million of federally taxable GO refunding bonds last week in a deal city officials said will garner $14.6 million in net present value savings over the next 14 years.

City Treasurer Christian Dunbar said aggressive pricing for the Jan. 16 transaction achieved a total borrowing cost of 2.88% with the deal finishing more than five times oversubscribed from over $600 million of orders.

Philadelphia’s previous deal, an Aug. 1 $293.4 million tax-exempt GO offering, was more than 10 times oversubscribed and netted $15.9 million in interest savings compared to its previous GO deal. The city also executed a $250.7 million water & wastewater revenue borrowing for the Philadelphia Water Department last summer where total retail and institutional orders exceeded $600 million.

The 2020A bonds were priced in an environment where demand for municipal debt is higher than 2019 due largely to a lack of supply, market watchers have said recently. There has also been a surge in taxable deals that picked up late last year because low interest rates make it pencil out to refund tax-exempt debt with taxable paper. A 2017 federal tax law ended the use of tax-exempt bonds for advance refundings.

The bonds were sold by an underwriting syndicate led by Wells Fargo with Ramirez & Co. as co-senior manager. Lower overall interest rates on the bonds generated an estimated $1 million of additional net present value savings to the city compared to pre-pricing estimates, according to Dunbar.

“The high demand for Philadelphia Bonds by the investor community continues to validate the steps this administration has taken to improve the fiscal health of the City,” Dunbar said in a statement. “This transaction is also a great example of excellent execution by the underwriter.”

Spreads for the bonds to U.S. Treasuries were 0.85% for 10-year maturities. This marked a 0.25% improvement compared to Philadelphia’s last taxable bold sale in September 2018, according to Dunbar.

An improved financial position ahead of the mid-January sale contributed to demand for the bonds, Dunbar said. S&P Global Ratings revised its outlook on the city’s A rating to positive from stable on Nov. 21 citing strong revenue growth along with a sharp focus on pension funding, school district support, boosting reserves and establishing a rainy day fund. Moody’s Investors Service and Fitch Ratings also maintained their A2 and A-minus ratings late last year with stable and positive outlooks, respectively.