Laredo Independent School District
Unlimited Tax Refunding Bonds, Series 2015
Siebert Brandford Shank served as the book-running senior manager on the above entitled transaction for the Laredo Independent School District (“District”). This transaction represented the firm’s second senior managed transaction completed for the District. The proceeds of the bonds were used to current refund the Series 2005 Bonds and advance refund the Series 2006 Bonds. With strong underlying ratings of A1/AA-/AA- and the backing of the Permanent School Fund (“PSF”) guarantee of Aaa/AAA/AAA, the District’s transaction was able to weather the weak municipal bond market to generate the required net present value (“NPV”) savings goal.
When the District received school board approval to proceed with this refunding transaction in April, NPV savings were in the 14% of refunded par amount range. To balance the debt service savings generated from the refunding with negative arbitrage, the District required a minimum NPV savings of 10%. But with interest rates near historical lows, many issuers nationwide proceeded to enter the market to take advantage of refunding opportunities. As the municipal bond supply calendar kept on growing on a weekly basis, the fixed income market was pushed lower further due to recent discussions and anticipation of the Federal Reserve raising interest rates. From April 1st to May 27th (bond pricing), the AAA MMD yield curve increased by as much as 43 basis points, reducing the debt service savings potential for the District’s refunding.
On the Friday (May 22nd) prior to pricing, the District and its finance team monitored the market to determine whether it should proceed with the combined refunding or just the current refunding. This discussion was needed as the SLGS window was closed and the District was required to solicit bids from at least three different providers on the open market Treasury securities for the refunding escrow. Based on Friday’s interest rates, the District’s NPV savings fell to 11.54% from the 14% levels of early April. The District only had a cushion of interest rates increasing by 23 basis points before the NPV savings fell below the required 10%. With the cushion, the District proceeded with the combined refunding.
Going into the week of pricing, the municipal bond market was steady and quiet for high quality bonds similar to the District due to the shortened Memorial Day holiday trading session. However, there was a continued outflow of cash from the municipal bond market for the third week in a row, six weeks total in 2015. In addition, the District’s refunding transaction was scheduled to price on the same day as headline transactions such as a $674 million City of Chicago General Obligation Bonds (bonds rated NR/A-/BBB+/A-, but subsequently downgraded to Ba1/BBB+/A-/A-) and a $1.24 billion State of Pennsylvania General Obligation Bonds.
As the order period began, the 2018 through 2020 maturities were immediately filled on a priority basis with the 2017, 2026, and 2029 maturities oversubscribed less than five minutes later. As expected, the early and later maturities were fully subscribed for with the middle maturities gaining minimal traction in priority orders. At the end of the order period, the 2021 through 2022 and 2025 through 2026 maturities had balances left over and not sold. Siebert Brandford Shank made recommendations to the pricing spreads, lowering the yield on the oversubscribed maturities 1 to 2 basis points and increasing the yield on the not fully subscribed maturities by 1 to 3 basis points.
With the recommended pricing adjustments, the refunding generated NPV savings of $8.84 million or 11.80% of the refunded par amount. On an annual basis, the refunding produced an average annual savings of $747,491 which will be applied to lower the property taxes for District’s residents. Siebert Brandford Shank’s sales desk secured $91.03 million in total orders ($73.75 million in priority orders) or 77.81% of the total orders submitted by the underwriting syndicate. Most importantly, Siebert Branford Shank used its capital to step up and underwrite $15.79 million in unsold bonds for the benefit of the District.