With a revamped marketing push to attract investor interest, Philadelphia this week will sell $272.2 million of tax-exempt general obligation debt to finance ongoing capital projects and refund earlier bonds for debt-service savings.
JPMorgan will begin institutional pricing on Wednesday after holding a one-day retail order period Tuesday.
City officials crafted the deal with the retail market in mind.
A selling group of more than 50 investment banks will help place the bonds and the city made sure to release the preliminary official statement more than a week before pricing to give the firms more time to market the debt.
In addition, the structure of the sale includes a lot of bonds maturing up front, said Philadelphia Treasurer Nancy Winkler.
“We’re trying to have a very deliberate and thoughtful marketing period to try to maximize the retail participation,” she said.
The Series 2011 GO bonds will offer $196.9 million of serial bonds maturing 2011 through 2031, according to the POS. A pair of term bonds sized at $31.8 million and $43.4 million are set to mature in 2036 and 2041, respectively.
This is Winkler’s first bond transaction for the city. She joined Mayor Michael Nutter’s administration at the end of January after more than 28 years at Public Financial Management Inc., where she advised Northeast issuers, particularly in New York and Maryland, on financial matters and debt issuance.
To help attract interest in the GO deal, Winkler and other city officials updated the treasurer’s investor website to offer a one-stop shop for information on Philadelphia’s operations, included more data on the city’s finances in the POS than in previous bond documents, and recorded an investor presentation for interested buyers.
The city also plans to run a newspaper advertisement and is conducting small-group discussions with institutional investors to address their questions and concerns.
City officials are hoping that those initiatives, along with a recent Standard & Poor’s outlook change to positive from stable, will help break through any lack of investor confidence in municipal bonds. Demand for tax-exempt debt has waned as muni mutual funds experience outflows and municipal credits fight the stigma of some cities and towns teetering on the brink of insolvency.
“We recognize the market is where it is right now and we follow the market,” Winkler said. “We feel good about where we are, especially with the positive outlook from S&P and the strong financial leadership that the city has — beginning with Mayor Nutter.”
Standard & Poor’s rates the Series 2011 bonds BBB. Fitch Ratings and Moody’s Investors Service rate the transaction A-minus and A2, respectively.
Standard & Poor’s describes the administration’s financial management as strong and proactive in rebalancing the city’s budget during the past two years when officials closed deficits totaling $2 billion. Fitch notes Philadelphia’s “prudent budget balancing measures in recent years.”
Nutter, who took office in January 2008, worked as an investment banker before serving on the City Council and earned his BA from the Wharton School of Business in 1979. In addition, his chief of staff, Clarence Armbrister, was a director at UBS Financial Services Municipal Securities Group, a former partner at Saul Ewing LLP, served as Philadelphia’s treasurer, and was chief operating officer at Temple University.
“The mayor’s really focused on having a strong leadership team in the management of the city’s finances, starting with him,” Winkler said.
Philadelphia had $4.29 billion of outstanding debt that’s paid from the city’s general fund, including $1.24 billion of GO debt, as of Feb. 28, according to the POS. The $4.29 billion also includes $533.9 million of Pennsylvania Intergovernmental Cooperation Authority bonds that are paid from a dedicated 1.5% wage tax and another $2.51 billion of bonds are obligations the city repays through lease payments. Winkler stressed that these are contractual payments that the city must incorporate into its annual budget and not debt subject to appropriation.
“It’s not like a normal lease obligation where each year it’s optional for council to appropriate or not,” she said. “Council has already bound future councils to pay these bonds. And it’s explicitly authorized in the city charter.”
While the city anticipates ending fiscal 2011 with a positive fund balance of $13.5 million, according to Standard & Poor’s, it will face higher pension payments in fiscal 2013 and 2014 due to previous deferred payments.
Philadelphia’s January unemployment rate is 10.8%, according to the Bureau of Labor Statistics, and nearly 25% of its citizens live below the poverty line, according to Fitch.
Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said the Philadelphia GO deal comes as the market anticipates volume to increase somewhat, which benefits buyers but could force issuers to pay more when borrowing. He expects the bonds will price on the cheaper side.
“We’re big believers in the fact that as yields rise, demand will rise from direct retail,” Pietronico said. “But what that means for a loan like this is really in question because from a credit perspective, it’s probably not high enough up the credit ladder for a lot of individual investors.”
Recent census data shows that Philadelphia is now the fifth-largest city in the U.S., up from its sixth-place position. That’s a credit positive for the city, Pietronico noted, but its structural challenges and relatively high cost of doing business are credit concerns, he said.
“If you want to create a map of large cities, I would say Philadelphia might be smack right in the middle between Detroit and New York City in terms of their finances,” Pietronico said. “Not nearly as bad as Detroit, but certainly not up to the caliber of New York City.”
Philadelphia’s unfunded pension liability was $4.93 billion as of July 1, 2010, and its funding level is 47%. The city’s other post-employment benefits obligation was $1.1 billion as of July 1, 2009.
Of the $272.2 million deal, about $139.1 million will help finance infrastructure needs throughout the city, including an ongoing $90 million renovation of City Hall’s exterior, upgrades to numerous recreational centers, a new fire station, street resurfacing, and improvements at the Philadelphia Museum of Art, among other projects.
Another $133 million will refund GO debt sold in 1998 and 2001, with officials anticipating net-present-value savings of nearly 6%, according to Winkler.
She said any potential bond insurance for the transaction will depend upon demand at the time of pricing.
Winkler’s goals are to help the administration grow the city’s fund balance and develop a strong dialogue with investors. In addition, she will be working on renewals for $1 billion of letters of credit that will expire this year. Those LOCs help support GO debt as well as the city’s airport bonds, water bonds, and gas bonds.
“Another major goal is to build strong relationships with letter of credit providers” Winkler said.
The city’s underwriting pools for its GO credit and other revenue credits will expire at the end of the year and she anticipates releasing a request for proposals to revamp those underwriting groups in the fall or early winter.
The treasurer position allows Winkler to work on a variety of different credits — GO, gas, water, and airport — and she also manages $2 billion of operating and bond-fund investments and the city’s commercial banking needs.
“I always imagined myself towards the end of my career going into the public sector, but I always wanted to work for someone that I felt would value the contribution I could make,” she said. “And I think it was clear that I’d be joining an already very strong team and that I would get that support. So it lets me do something I always wanted to do.”