Kansas City Sanitary Sewer Refunding 2016A

City of Kansas City (MO)
Sanitary Sewer System Improvement and Refunding Revenue Bonds, Series 2016A

SCS provided tailored marketing plan and customized structure to accommodate policy constraints

In January Siebert Cisneros Shank successfully priced this transaction, consisting of $150 million new money bonds to fund Kansas City’s sewer system improvements, including part of their $4.5 billion consent decree-driven overflow program, an advanced refunding of the 2007A Bonds, as well as a current refunding of the 2005B Bonds.

Given the City’s strict policy constraints requiring the bond premium to not exceed 10% on voter-approved new money bonds, we developed a tailored marketing plan and structure to stay within these limits and achieve the best pricing results for the issuer.
With a recent decline in municipal bond rates increasing prices for premium bonds, our underwriter stressed the importance of releasing a pre-marketing wire the day prior to pricing in an effort to evaluate interest in a structure that would require a significant portion to be issued with sub-5% coupons.
After pre-marketing various coupon structures, SCS recommended a structure that would target specific types of investors while allowing for enough cushion on the premium restrictions in the case that yields could be reduced due to high investor demand.

The structure consisted of 2% coupon bonds on the front-end to draw professional retail accounts that have dollar price restrictions, 4% bonds throughout to adhere to the premium restriction (including bifurcated 2040 term bonds with a 3.375% discount to draw additional investors), and 5% bonds in the 10 – 13 year range where there is limited demand for 4% coupon bonds.
The transaction was set to price on the day of an FOMC rate decision and while there was limited expectations for any revisions, we recommended an accelerated pricing schedule that would allow the City to lock in pricing in advance of the 2pm announcement.

Our approach and strong sales effort resulted in a solid order book of nearly $900 million in priority orders—with varying degrees of oversubscription throughout the curve. Our underwriter recommended a repricing of up to 8 bps lower in yields for the City while MMD at the end of the day increased up to 2 bps on the long-end as the market weakened.

Although investors generally prefer 5% coupons, we successfully sold $152.3 million of sub-5% coupon bonds—close to 83% of the transaction. We brought in orders from 55 different investors, including 22 which had not reported holding this credit at the time of the sale.

The new money portion of the transaction achieved an all-in TIC of 3.01% for 25-year fixed rate level debt, as well as a $4.9 million of net present value savings for the City on the refunding—12.6% of refunded par.