The Pittsburgh and Allegheny County Sports and Exhibition Authority Tuesday will sell $150 million of tax-exempt revenue bonds to refinance debt and generate savings.
The fixed-rate bonds are secured by taxes on hotel rooms. The current refunding will refinance a portion of the authority’s Series 1999 hotel room excise tax bonds that it sold at that time to help finance an expansion project at the David L. Lawrence Convention Center in Pittsburgh.
Officials anticipate the refunding will generate at least 3% net present-value savings, the minimum requirement. The savings will help finance capital improvements at the convention center, including a new cooling system, according to the preliminary official statement.
PNC Capital Markets LLC is book-runner for the deal. Eckert Seamans Cherin & Mellott LLC and Berry & Associates are co-bond counsel. Public Financial Management Inc. is the financial adviser.
Along with capturing lower interest rates, the refunding enables the authority to replace Ambac Assurance Corp., insurer of the 1999 bonds, with Assured Guaranty Municipal Corp. as insurer of the 2010 bonds.
Assured Guaranty is the highest-rated municipal bond insurer. It carries Aa3 and AAA ratings from Moody’s Investors Service and Standard & Poor’s, respectively, both with a negative outlook. In comparison, Ambac has a non-investment grade rating of Caa2 from Moody’s. The credit is on review for an upgrade.
Officials are looking to grab a lower cost of borrowing by switching insurers.
“At the end of the day, what we’re trying to do is achieve the highest level of debt-service savings,” said Barbara Bisgaier, managing director at PFM. “And this is the structure, with the insurance, that we believe will achieve that.”
She said the authority will refund as much of its Series 1999 hotel-tax bonds as is cost effective, depending upon Tuesday’s market conditions.
Standard & Poor’s and Moody’s assign their underlying ratings of A-minus and Baa1 to the Series 2010 bonds.
The refunding will include maturities from 2011 through 2035, according to the POS.
The bonds are secured by Allegheny County’s 7% hotel tax. That 7% includes a 5% basic levy and a 2% added levy that officials implemented in 1997. The added levy will expire on Aug. 31 2027, the POS says.
“The loss of that 2% doesn’t cut the numbers so low that the 5% alone couldn’t cover the debt service,” Bisgaier said.
Moody’s said the expiration of the 2% “does present potential credit weakness.”
The county collects the revenues and distributes them to the bond trustee. Monroeville receives the first allocation of the basic levy as one-third of hotel tax revenue collected in a municipality that has a convention center or exhibit hall — except Pittsburgh — must be reserved for that municipality to help finance its convention center. Monroeville is currently the only municipality that receives the revenues. It gains about 2.5% of the basic levy.
After Monroeville’s allocation, hotel revenues pay the authority’s hotel-tax bonds.
The authority anticipates collecting $11.9 million of hotel-tax revenue in 2011, with that amount increasing to $13.7 million annually from 2016 through 2027, according to the POS.
In 2028, expected revenues decrease to $11.5 million as the 2% added levy will expire. Anticipated revenue for the authority in 2035 is $12.7 million.
Total hotel-tax receipts dropped in 2009 by 9.3% to $22.3 million after increases of 12.6% and 13% in 2007 and 2006, respectively.
The revenue stream historically has grown at an average 3.9% annually, according to Moody’s. Both Moody’s and Standard & Poor’s note the changes to the revenue stream in their ratings.
The lien is “a particularly economically sensitive revenue stream coupled with a weakened hotel industry due to the national recession,” according to Standard & Poor’s.
Conversely, the agency believes Allegheny County’s hotel industry feeds off of several different facilities in the area, many of which the authority oversees.
They include Heinz Field, home of the National Football League’s Pittsburgh Steelers; PNC Park, where Major League Baseball’s Pittsburgh Pirates play; the convention center; the Consol Energy Center, which will begin hosting the Pittsburgh Penguins National Hockey League franchise later this year; and various other cultural centers and parks.
Mary Conturo, the authority’s executive director, said it is not expecting a new-money issuance on the horizon.
The rating agencies both noted that an absence of new-money issuance is a credit strength for the hotel-tax credit.
“The stable outlook reflects our expectation of continued good debt-service coverage by hotel-tax revenues, with no plans for additional debt,” Standard & Poor’s said.
Officials are hoping that Tuesday’s sale will deliver refunding savings similar to a $173.7 million sales-tax deal that priced on Aug. 11, also with PNC as senior manager.
The authority refinanced all of its Series 1999 regional asset district sales-tax revenue bonds in a current refunding and generated nearly $11 million of net present-value-savings, Bisgaier said.
“It was a highly successful sale with really great market conditions,” she said. “And we got savings substantially in excess of what had originally been anticipated.”
Officials also selected Assured Guarantee to insure the Series 2010 sales-tax bonds and ended Ambac’s insurance on the Series 1999 sales-tax bonds.
Moody’s and Standard & Poor’s rate the RAD sales-tax bonds an underlying A2 and A-plus, respectively.
The underlying ratings are slightly higher than the ratings on the authority’s hotel-tax lien.
The transaction included serial bonds maturing from 2011 through 2025. Yields on the bonds ranged from a 2% coupon maturing in 2011 with a 0.446% yield to a 4% coupon in 2025 yielding 4.12%, according to the official statement.
A 2031 term bond for $67.9 million priced with a 5% coupon yielding 4.5%.
