SAN FRANCISCO -The Successor Agency to the Redevelopment Agency of San Pablo, Calif. is planning a bond sale Tuesday to refund its expensive fixed-rate and variable-rate tax allocation bonds for millions of dollars in debt service savings.
The agency will sell $52.4 million of tax allocation bonds to refund most of its high-coupon, fixed-rated, senior lien tax allocation bonds, as well as all $30 million of its outstanding subordinate lien variable-rate tax allocation bonds.
"The real impetus for this deal was to get the agency out of variable-rate debt, which has been like a noose around its neck for the past several years," said Steven Gortler, the agency's financial advisor. "With the benefit of 20/20 hindsight, it was probably a mistake for the agency to issue variable-rate debt in the first place."
The agency issued $36 million of variable-rate bonds in 2006, when it was hoping to substantially lower its long-term interest costs by issuing variable rate bonds and entering into a floating-to-fixed interest rate swap, creating a synthetic fixed rate.
"However, in the aftermath of the 2008 financial crisis and the great recession that ensued, the agency's variable-rate debt has proven to be a double-edged sword," Gortler said. "Whatever the agency may have initially saved in interest costs is now more than offset by its letter of credit fee, which is currently a whopping 250 basis points per year."
The agency will use another $4.2 million of proceeds for the termination payment to unwind the floating-to-fixed interest rate swap.
San Pablo, a city of 29,000 located 20 miles outside of San Francisco in Contra Costa County, is acting as the successor agency to the redevelopment agency, following the 2012 dissolution of California redevelopment agencies.
"Interestingly, this deal could never have happened before the state dissolved redevelopment," Gortler said. "Thankfully, the drafters of the Dissolution Act had the foresight to include a provision that allows successor agencies to secure refunding bonds with a pledge of the revenue derived from multiple project areas, rather than just one project area, as was the case before dissolution."
The redevelopment project areas include the Tenth Township redevelopment area, which covers approximately 72% of San Pablo, and the Legacy project area, which completely overlaps Tenth Township, plus an additional 346 acres.
Gortler said that together with the ability to pledge revenue from the former 20% housing set-aside, the boosted debt service coverage on the bonds was enough to garner an A-minus credit rating from Standard & Poor's.
In addition to strong debt service coverage, the credit ratings agency also cited the closed senior lien and closed parity lien, as well as the refunding of the variable-rate bonds into fixed rate, which reduces credit and liquidity risk.
"In our view, the swap did not fully hedge the interest rate risk of the variable-rate bonds," Standard & Poor's said in the credit report. "Moreover, in our opinion, the swap introduced additional liquidity risk because the rating on the bonds was close to its termination trigger. The 2014 bonds will eliminate both risks by refunding the variable-rate bonds to fixed rate."
Offsetting the credit strengths are the steep declines in combined project area's assessed value in recent years, tax increment plan limitations, and the city's low to adequate wealth and income levels, analysts said.
Standard & Poor's assigned a stable outlook, which reflects San Pablo's proximity to the San Francisco metropolitan area, as well as the belief that the successor agency will continue to actively manage cash flow under the post-dissolution flow of funds in order to provide adequate debt service coverage.
Morgan Stanley is expected to price the bonds on Tuesday. Orrick, Herrington & Sutcliffe LLP is bond counsel.
The deal will be structured in two series — $45.7 million of Series A bonds, and $6.8 million of Series B bonds.
Gortler said the agency added the $6.8 million forward delivery Series B portion at the eleventh hour in order to refund on a current basis some of the senior lien bonds that aren't eligible to be refunded on an advance basis.
"Based on current market conditions, which seem to be improving almost daily, we expect this refinancing to yield approximately $3.50 to $3.75 million in present value debt service savings, or about 6.00% to 6.50% of the refunded par," Gortler said. "Obviously, if it weren't for the large swap termination payment, we'd be crowing even louder."