Philadelphia, April 22, 2014 – The City of Philadelphia announced that it sold $65.155 million of bonds for the initial financing of the Public Safety Services Campus at 4601 Market Street through a competitive sale process in two series – a $61.095 million tax-exempt series with bonds maturing from 2021-2044 and a $4.06 million taxable series maturing 2018-2020 – working through the Philadelphia Municipal Authority. This is the first time the City has sold long-term bonds competitively since 2006.
“The competitive bond sale process was a clear success – saving taxpayers more than $7 million over the life of the bonds. I want to thank City Treasurer Nancy Winkler for her hard work, without which this competitive bond sale would not have been possible,” said Mayor Michael A. Nutter. “Moving forward, our Administration will continue to focus on maintaining general fund balance and improving pension fund contributions, both of which are critically important to our municipal credit rating.”
With the City’s bond upgrade to “A+” by Standard & Poor’s in December 2013, following an upgrade “A-” earlier in 2013 which brought the City’s bond rating by all three major municipal credit ratings into the “A” category, the City is now able to periodically sell bonds competitively, a practice in which bonds are offered over the internet using a bidding platform that enables any Wall Street or local investment firm to participate and compete for the bonds. The bonds are then awarded on the basis of lowest interest cost.
In addition, the improved rating also means that the City’s General Obligation bonds are eligible to be sold to individual retail investors, which significantly increases the pool of potential investors, lowers borrowing costs and enables a successful competitive sale.
The City received 14 bids for the tax-exempt bonds. The all in tax-exempt borrowing cost 4.21% and was won by Bank of America. In addition, the City received 8 bids for the taxable bonds. The all in borrowing cost for the taxable bonds was 2.798% and was won by Ramirez & Company.
These lower rates will result in approximately $7.4 million less in debt service over the life of the bonds or approximately $200,000 less per year. Given the low costs, the City increased the borrowing amount to generate $6 million more in proceeds for the project. A second transaction is planned for late 2015 to complete the financing for the Public Safety Services Campus project.
The City usually sells its bonds via negotiated sale – whereby it selects underwriters ahead of the sale and negotiates the interest rates and bond terms on the day of the sale. This can be beneficial for a variety of reasons, including flexibility of when to enter the market, the ability to include local and MBE/WBE firms in the underwriting team and increased ability to sell more complicated financing structures. The City Treasurer indicated that the periodic use of competitive sales is part of the City’s overall debt management strategy to lower borrowing costs. The rates were the lowest achieved for the City’s general fund supported debt since the onset of the Great Recession.
“We are well served by the many investment banking firms that cover us, and that we normally use in the negotiated process to sell bonds,” said Nancy Winkler, City Treasurer. “We think it is in the City’s interest to allow the market to directly weigh in and compete head to head for the City’s bonds, on a periodic basis. For the last three years, we have had success selling the City’s annual cash flow notes (TRANs) competitively. We felt this sale would be a great way for the City to return to the competitive bond market after an eight year absence.”
The last time the City sold bonds competitively was in 2006, before the fiscal crisis, when the availability of triple-A bond insurance enabled the City to greatly reduce investor concern about the City’s “BBB” Standard & Poor’s rating. Since the crisis, few issuers are using municipal bond insurance as all insurers have either been significantly downgraded or exited the business entirely. The City did structure its bid terms to allow bidders to purchase bond insurance. Bank of America Merrill Lynch purchased bond insurance from Assured Guaranty for the tax-exempt bonds. While Bank of America indicated that the bond insurance lowered the yields by approximately 2-3 basis points to investors, the vast majority of the improved pricing was not due to bond insurance. The taxable bonds were not insured.