As most readers of The Bond Buyer probably remember, in November 2015, former President Obama signed into law a temporary suspension of the federal debt ceiling. Consequently, Treasury's Bureau of Public Debt re-opened the so-called "SLGS Window," which had previously been closed, and issuers were able once again to order SLGS for refunding escrows. This suspension is scheduled to expire on March 15th.
This suspension was the third time in approximately four years, that a potential debt ceiling breach was resolved differently than the way it had historically been addressed. Prior to 2013, when a debt ceiling breach approached, Congress typically approved a specific dollar increase in the debt ceiling level with such increase sufficient for Treasury to manage its borrowing for an extended period of time. More recently though, Congress has take a different approach to potential breaches of the debt ceiling. This new approach is for Congress to temporarily suspended the debt ceiling for a definitive period of time. The most recent suspension expires on March 15, 2017. As a result, absent any further action by Congress, the debt ceiling will automatically reset to the nation's debt level on that date and we will be at the debt limit. This has important implications for municipal issuers selling refunding debt during the next several weeks.
Because on March 15th, we will be will be at the debt limit, the Bureau of Public Debt will likely be unable legally to deliver SLGS securities to municipal issuers with a settlement date on or after that date. As most municipal bond sales are priced several weeks ahead of the closing date, this can impact issuers' bond sales scheduled for as early as late February to early March with closings scheduled for dates after March 15th. To date, we have not seen any notification from Treasury regarding this concern, and it is possible that they have already accepted SLGS subscriptions for settlement past March 15.
As Cityview has written in the past, the Federal government uses the SLGS program as a debt management tool, and is under no obligation to provide market participants with significant advance notice of any temporary cessation in their acceptance of applications for the purchase of SLGS. Further, although historically the Bureau of Public Debt has honored all SLGS applications that were received prior to any window closings, a review of the SLGS regulations makes it clear that they are not legally required to do so. And in this case, they may be legally prohibited from doing so.
As a means to mitigate transaction execution risk, issuers should begin evaluating alternative means for purchasing escrow securities in the secondary market ("Open Markets") through competitive bidding. Fortunately, the effectiveness of this approach was reaffirmed during other recent SLGS window closures and issuers found the process, when managed professionally, to be efficient and effective with ample supply of dealers to compete. Even after the SLGS window reopened, many issuers reaped the benefit of being able to compare the cost of purchasing a refunding escrow with Open Markets versus the SLGS as long as there was sufficient preparation within the team.
While under normal market conditions some issuers and bond counsel firms prefer the ease and simplicity of the SLGS application process over a competitive bidding process, the looming closure of the SLGS window introduces new transaction risks that must be properly and prudently managed. In the very near future SLGS subscriptions may not be available through, or honored by, the Bureau of Public Debt, and bond sales may be delayed or bond closings may be jeopardized.
Because it can take 48-72 hours to properly structure and complete a bid process, in a situation where SLGS are suddenly unavailable for subscription, there may not be sufficient time to structure and complete a tax-compliant bid process if advance planning has not occurred. This might necessitate a delay of several days, putting the economics of the refunding at risk as markets can move adversely during this period and targeted savings levels may no longer be achievable.
For refunding transactions scheduled to be sold during this period of uncertainty, it is imperative that Open Market securities be seriously considered as a risk reducing strategy. Furthermore, as a matter of prudence, it is advisable to dual track both Open Markets and SLGS up until the day of pricing.
Sam Gruer is a Managing Director at Cityview Capital Solutions, LLC, an independent municipal advisor.
