LOS ANGELES — One of California's largest and best-rated local credits is getting ready to sell $210 million of general obligation bonds in a market that's in need of the Golden State's paper.
San Francisco, with double-A and double-A-plus ratings, is scheduled to sell the bonds in a competitive offering on Jan. 16.
"It's going to go great," said Marilyn Cohen, founder of Envision Capital Management in Los Angeles. "And the reason is very simple — there is not that much California paper out there available."
With the large amount of bonds that have been called, and many that have matured, high-net-worth investors in the state are in desperate need of California bonds, she said.
"I think managers of all shapes and all sizes — large, medium and small — that are California-specific are scratching around like hens trying to find some morsels," Cohen said. "And this is good quality, it's a decent size, it'll be pretty liquid, so I think it's a winner."
The bonds, which are secured by an ad valorem pledge on all taxable property in the city, will have a final maturity in 2033, according to Nadia Sesay, the city's public finance director.
Proceeds from the bond sale will go toward San Francisco's biggest public works project: rebuilding its general hospital.
"This proposed sale of bonds will finance the continued construction of the new General Hospital Project, service building modifications associated with the new emergency generators, and modifications to the existing hospital building 5 related to the General Hospital Project," Sesay said.
San Francisco's new hospital building is being completely financed through $887.4 million of general obligation bonds.
The bond measure was approved by more than two-thirds of city voters in a November 2008 referendum. The bond issues have provided funding for the replacement of the old hospital, which was at risk of collapsing during an earthquake, and as a result was required to undergo renovations or replacement under California law.
The 1994 state law required all acute-care hospitals to be seismically safe by 2013. Hospitals were able to ask for extensions if they are in the process of retrofitting.
The General Hospital and Trauma Center, located between the Mission District and Potrero Hill, is the main public hospital in San Francisco. It serves around 100,000 patients each year and provides 20% of the city's in-patient care.
Construction on the new 453,000-square-foot hospital, designed by Fong & Chan Architects, began in 2009 and is expected to wrap up next year.
"We are excited to deliver a state-of-the-art hospital and Level 1 Trauma Center to provide excellent care for all San Franciscans, and look forward to opening our doors in 2015," said Terry Saltz, program manager for the hospital rebuild program.
When completed, the new facility will be seven stories above ground, with two basement floors and 284 beds — slightly more than the old hospital. The San Francisco Department of Public Works is responsible for management of the building.
Funding for the hospital so far has included $131.7 million of bonds issued in March 2009, $294.7 million in March 2010 and $251 million in August 2012. Next week's bond sale will be the fourth and final series issued for the hospital project.
The bonds have received double-A ratings from the three major credit-rating agencies, which cite San Francisco's very large and growing economy as a main strength.
The city's 2014 tax base grew by 4% to $172 billion, replicating the growth rate for 2013, according to Moody's Investors Service, which assigned the bonds its second highest rating at Aa1 and a stable outlook.
Moody's analysts added that the size of the tax base is "unusually large" and is more than double the median for Aa1-rated cities with populations greater than 500,000.
San Francisco has a population of over 825,000.
The city's economically sensitive revenues, such as hotel, business, property and sales taxes all increased in 2013 and are tracking for continued growth in fiscal 2014.
"Unemployment has fallen to 5.3% and is well below the state and national marks as has been the case each year since 2004," analysts said. "We anticipate that unemployment will continue to fall as a result of job creation in technology, tourism, research, construction and finance."
Standard & Poor's assigned an equivalent AA-plus rating, with a stable outlook.
"We believe the city has a very strong economy and strong budgetary flexibility, which is supported by very strong management conditions," said S&P credit analyst Misty Newland. "We do not expect to revise the ratings within the next two years because we do not anticipate a significant improvement to the city's large retiree benefit obligation, and we believe the city will maintain strong budgetary flexibility and very strong liquidity."
Fitch Ratings gave the bonds a slightly lower rating at AA, also with a stable outlook. Analysts said the rating reflects the city's ongoing improvements to budgeting, planning and reserve policies that Fitch believes will limit what has historically been a high level of volatility in year-to-year financial performance.
All three credit reports cited the city's growing retirement cost pressures as one of its main challenges.
"In our opinion, the city's debt and contingent liabilities profile is very weak," S&P analysts said. "We consider the city's pension and other post-employment benefit obligations to be large, with contributions that continued to exceed 10% of total governmental funds expenditures in fiscal 2013."
Fitch views the current pension OPEB costs as manageable for the city, but notes that they are likely to rise over the medium term.
San Francisco city and county last sold general obligation bonds in a $232.5 million competitive offering in June. Bank of Americal Merrill Lynch won the bid with a true interest cost of 3.3589%.
Since that issuance, Standard & Poor's has
Schiff Hardin LLP and Amira Jackmon are co-bond counsel on next week's deal. Montague DeRose and Associates and Backstrom McCarley Berry & Co. are co-financial advisors.
