Lease Public Improvement Bonds Series 2016 & Certificates of Obligation Taxable Series 2016 (September 2016)
The fourth transaction senior-managed by Siebert Cisneros Shank for the City of Austin
This September issue was SCS’s fourth senior-managed transaction for the City of Austin. Confident in our performance based on prior transaction experience, the City awarded the deal to SCS with only one other underwriter. The triple A rated taxable structure included serial bonds maturing from 2017 to 2030 and three term bonds maturing in 2032, 2034, and 2036. Since both the Lease Public Improvement Bonds and the Certificates of Obligation Bonds carried the same ratings, SCS sized the transaction with a mirrored maturity structure, providing greater flexibility in allocating bonds between the two series. The bonds were also subject to a 10-year par call.
Despite being rated in the highest rating category, the transaction faced several challenges. The timing of the transaction coincided with an historically low interest rate environment; and investors were reluctant to commit initially due to extremely low yields. In addition, the City’s bonding authorization required that each series of bonds generate the same level of project proceeds as the par amount. Therefore, the bonds had to be sold with some premium to cover the cost of issuance and underwriter’s discount. This requirement ran counter to market convention where taxable investors generally prefer par bonds. Finally, the $20 million of taxable issue had to be sold simultaneously with a larger $164 million tax-exempt offering by the City.
We developed an optimal pricing strategy that worked seamlessly with the concurrent tax-exempt transaction. Our main strategy for the taxable series was to minimize the number of taxable premium bonds, targeting only those maturing in years 2017 through 2021 and producing just enough premium to cover the transaction’s expenses. Our sales desk identified investors who would purchase taxable premium bonds without requiring additional pricing spread. To maximize investor participation, we recommended an early pre-marketing period, showing aggressive pricing spreads the day before pricing. The transaction was well received with nearly all bonds fully subscribed for except for the 2017 and 2018 maturities.
We recommended lowering pricing spreads by 2 to 3 basis points for maturities that were oversubscribed. For the 2017 and 2018 maturities, the spread was increased by 5 basis points which resulted in a full subscription of the 2018 maturity. SCS underwrote the remaining unsold balance of the 2017 maturity, totaling $810,000. When compared to the City’s taxable trans-action in the previous year, spreads for this transaction were 7 to 40 basis points lower. The all-in TIC for the bonds was 2.857%.