A proposed tax increment financing-type bond structure is among the new things themunicipal market might see from New York City this year, along with a possiblerestructuring of the city's tobacco debt.
The city will also continue lobbying Albany to lift the cap on its Transitional FinanceAuthority debt, which, if successful, would lead to the return of the double-A ratedcredit to the market. City officials also will attempt to convince lawmakers inWashington, D.C., to extend $9 billion in special, second advance refunding authority.
According to Thomson Financial, New York City sold nearly $6 billion of new-money andrefunding general obligation bonds last year, along with nearly $2 billion in TFA debt.The other major source of volume was the city's Municipal Water Finance Authority, whichalso sold around $2 billion of new-money and refunding bonds.
The city is in the middle of the fiscal 2004 budget, which calls for $5.5 billion in newcapital borrowing, while the proposed fiscal 2005 budget calls for $5.3 billion. As aresult of exhausting the sales tax-backed TFA authorization, the city expects to rely onthe lower-rated GO credit to back $2.2 billion of new-money bonds to support ongoingcapital projects in this year's budget, according to the most recent budget documents.That will cost the city more in interest than it would pay using the TFA credit.
Alan Anders, the city's deputy budget director, said in a recent interview that themarket should expect new-money borrowing to be about the same in calendar 2004 as it wasin 2003. On the refunding front, Anders said the market might also see the city usingmore variable-rate debt in order to utilize interest rate swaps to lock in lowersynthetic fixed rates.Armed with swapping powers from new state legislation, the city has amassed $965 millionin synthetic fixed-rate exposure on GO and TFA refunding bonds and $220 million in swapexposure on water authority debt. It also has a $671 million basis swap. Last month itdid its most complicated derivative transaction, an eight-year cost of funds swap on$500 million in privately sold multi-modal bonds that left the city exposed to syntheticvariable rates.
Anders said that his office has "moved along pretty well as far as documents onderivatives," and that this year finance officials will continue to consider syntheticfixed-rate swaps "in some refundings to lower the costs."
While officials plot bonding plans for the upcoming year, New York City's credit outlookimproved over the last year after suffering from the effects of the Sept. 11, 2001,terrorist attacks and the national economic recession. Last month, for instance, FitchRatings revised the outlook on the city to stable from negative. Fitch rates the GOcredit A-plus.
John Hallacy, head of municipal bond research at Merrill Lynch & Co., said creditspreads on the city's GOs have improved slightly in the last 12 months, possibly byaround five basis points compared to triple-A scales. He said the city's 10-year debtcurrently trades around 50 basis points over triple-A and 20-year debt trades around 40basis points over."There is still plenty of demand on the long end," Hallacy said. "You get a little morepressure in the intermediate part of the curve, which is why the 10-year is a littlecheaper."
One of the factors causing pressure on the intermediate part of the curve, Hallacy said,is budget uncertainty. Last week, Mayor Michael R. Bloomberg previewed some of hisbudget goals for fiscal 2005 in his annual state of the city address, most prominently aplan to rebate $250 million in property taxes.
While actual revenues are outpacing projections this fiscal year, the city still faces anumber of challenges in both fiscal 2004 and 2005, observers have said, and has to closea projected $1.8 billion gap next year. In the short term, the city has to grapple withrisks, such as possible cuts in state aid, while in the long term the market is stilllooking for structural budget balancing.
"The long-term problem still remains with the growing debt burden and the negativeimpact of increased taxes along with service reductions," said North Jersild, seniorvice president in municipal research at Loop Capital Markets. "The city may not appearas attractive to potential employers. That is just a concern."
The mayor also last week vowed to break ground on the redevelopment of Manhattan's farwest side by next year. The Bloomberg administration has said it will finance capitalinvestments in the neighborhood using off-balance sheet structures, such as some form oftax increment financing, and last month solicited new proposals from Wall Street for afinancing plan.
Last week, Bloomberg said the city would complete environmental and public reviewprocesses needed to extend New York City Transit's No. 7 subway line westward from TimesSquare, build 20 acres of new parks on the far west side, and double the size of theJacob K. Javits Convention Center.
The Bloomberg administration has also privately sought proposals from Wall Street forways to restructure its tobacco debt sold through the off-balance sheet corporationknown as TSASC Inc.
Last year, officials said they were considering restructuring TSASC in order toeliminate the need this spring to deposit $115 million of a $240 million tobaccosettlement payment into a trapping account to help further secure $1.2 billion inoutstanding TSASC debt. The downgrade of major tobacco companies triggered the so-calledtrapping event, which was peculiar to the structure of the TSASC debt and some of theother tobacco bonds sold in the municipal market.
Anders said that the city will look to resolve the TSASC situation this year, though headded: "It is not absolutely clear we need to do something immediately. We're going toconsider all of our alternatives. We obviously are thinking fairly intensively aboutit."
He said the three senior banks in TSASC's underwriting syndicate - Bear, Stearns & Co.,Citigroup Global Markets Inc., and Goldman, Sachs & Co. - have "given us a number ofproposals and some other [banks] have done the same thing."
In December, the New York County Tobacco Trust III - representing the counties ofOswego, Rockland, and Dutchess - priced $78.6 million of unenhanced tobacco settlementpass-through bonds, the first sale of unenhanced tobacco bonds since the sector fellapart in the spring. Anders said the successful sale "hasn't led in any direction oneway or the other. We are not necessarily looking at the same thing."
The TSASC restructuring could be significant for the ongoing capital program. WithoutTSASC, the city may be forced to sell even more GO debt. It had expected to sell $715million of tobacco settlement-backed bonds through TSASC this fiscal year for ongoingcapital projects, but indefinitely delayed the deal as a result of the problems with thetobacco bond sector.
TSASC was also expected to sell $717 million of bonds for ongoing capital projects infiscal 2005.
The city, which does not do much in the way of appropriation-type debt, used both theTSASC and TFA credits to diversify the debt it sold in the market to finance ongoingcapital projects. While problems in the tobacco securitization market undercut TSASC,the city simply ran out of TFA authorization, bumping up against a state-imposed $11.5billion cap last year.
Anders said a goal this year, like last, is to get Albany to lift the cap. Also on thelegislative front, he has said the city is seeking to get $9 billion in special, secondadvance refunding authorization extended before it expires at the end of this year.
Congress granted the $9 billion in authorization after Sept. 11 to aid the state's andcity's finances. New York City got access to half of it, and has used around $2.5billion.
