Suffolk County, N.Y., explores Fed borrowing facility for TANs
Long Island’s Suffolk County received authorization to tap a little-used Federal Reserve program for two upcoming note deals, but expects only one will offer better rates than competitive bidding, the county comptroller said.
Suffolk Comptroller John M. Kennedy said the county, which is eligible to use the Fed’s Municipal Liquidity Facility, is filing an application with the MLF this week for $100 million of tax anticipation notes scheduled to be sold next month and will also file to use the credit facility when issuing $410 million of TANs in December. The county, he said, will first try to sell the TANs in a competitive sale, turning to the MLF only if the central bank facility provides lower borrowing costs.
“I want to use every tool available to me,” said Kennedy of the MLF option. “My job is to raise the money necessary to keep this county solvent.”
Kennedy is optimistic the $100 million TANs will see sufficient market interest competitively, but he wants the central bank’s credit line as an option, since the county’s low bond ratings translate to interest rates above 2% for the note deals. The county’s $410 million TAN deal slated for December, which will offer cash-flow assistance by monetizing 2021 property taxes, will be more likely to at least partially tap the MLF, he said. The MLF program is due to expire on Dec. 31.
Suffolk estimates it would pay about 3.25% on the notes through the MLF, which is better than the 4% it paid on revenue anticipation notes it issued in April, Kennedy said.
S&P Global Ratings and Fitch Ratings downgraded Suffolk’s general obligation bonds one notch to BBB-plus from A-minus with negative outlooks in March, citing the county’s lack of reserves to combat revenue losses from the COVID-19 pandemic. Moody’s Investors Service rates the county Baa1 with a stable outlook.
New York’s Metropolitan Transportation Authority sold $450 million of transportation revenue bond anticipation notes to the Fed in August at 1.93%, after rejecting market bid. The MTA, a state-run entity facing plummeting ridership, and Illinois are thus far the only two municipal issuers to utilize the $500 billion MLF.
Municipal Market Analytics partner Matt Fabian said the MLF might offer lower interest rates to Suffolk, given the county’s steep fiscal challenges, since investors are unlikely to be drawn to the county's short-term debt without higher yields.
“Suffolk County faces, more or less a steady stream of headlines about its challenged budget, so private investors have wanted more yield from the county to compensate,” he said.
Tom Kozlik, head of municipal strategy and credit at Hilltop Securities, said the MLF is a valuable tool for issuers to alleviate cash-flow pressures because of delayed tax receipts, or from revenue reductions.
“We think the MLF is a valuable program despite the lower level of usage,” he said. “There was an impractical expectation of when the potential impact of COVID-19 would be over, and lawmakers should consider extending it into next year.”
Kennedy said the county will be filing its application with the Fed for the $100 million TAN deal Thursday and is set to take bids in mid-November. Capital Markets Advisors will serve as financial advisor and Harris Beach will be bond counsel.
Suffolk held a $280 million borrowing last week, comprised of $105 million of public improvement serial bonds, $135 million of tax-exempt refunding serial bonds and $40 million in BANs. The $30 million of tax-exempt bonds went at yields between about 0.857% and 0.87%, while $10 million of taxable notes were split, with $7.5 million going at a 1.14% yield and $2.5 million going at a 1.03% yield, but those rates are not what the county would get on a much larger sale, Kennedy said. The TANs could have been sold in the same offering, he said, but the county held off since County Executive Steve Bellone delayed releasing his proposed 2021 budget plan in hopes of additional aid arriving to prevent massive cuts.
Bellone unveiled a $3.19 billion spending plan on Oct. 9 that would cut 500 county employees. The county received $257 million in federal CARES Act funding to help cope with a projected $325 million revenue hit for 2020. S&P credit analyst Nora Wittstruck said additional federal aid in a possible new congressional stimulus package in early 2021 will be crucial for Suffolk to weather more financial headwinds caused by the ongoing COVID-19 pandemic.
“When we lowered the rating and left the rating on negative outlook in March that was our forward looking perspective of the challenges that they are now facing and wrestling with,” Wittstruck said.