G.O. Bond Anticipation Notes, Series B
SCS successfully markets and sells difficult credit
SCS served as senior manager for the Metropolitan District’s GO Bond Anticipation Notes which priced on July 20. (Ratings for BANs: short-term SP-1+; GO bonds: long-term Aa2 (negative)/AA(negative), Moody’s and S&P, respectively).
The District is comprised of eight member municipalities, including the City of Hartford which makes up 26% of the District’s ad valorem tax revenues. The City of Hartford has been under significant financial stress, with extensive negative press surrounding the City’s budgetary situation and potential bankruptcy filing capturing investors’ attention over the past two years.
Since 2014, Moody’s and S&P have significantly downgraded the City’s of Hartford’s GO, including downgrades just a week prior to the District’s BAN pricing. To mitigate the negative pricing implications of the City on the District’s BANs, SCS assisted the District in creating an investor presentation that was posted online highlighting the District’s solid financial performance and strength of its service area and clearly explaining the District’s newly-adopted contingency measures in the event of a City of Hartford default. The presentation was viewed by 20 different investors, 5 of whom placed $215 million in orders for the transaction.
SCS conducted extensive pre-marketing to gauge investors’ perception of the credit. We also organized one-on-one calls with the District with two investors, who placed a total of $145 million in orders for the BANs.
Syndicate price views indicated that the BANs could be priced at a yield within the 1.25% to 1.30% range; however, the initial feedback from those investors willing to participate at these levels was not sufficient to “build a book” of orders. SCS recommended postponing entering the market by a few hours and continued dialogue with investors, recommending that the BANs should enter the market with a yield of 1.65%. At these pricing levels, despite numerous major investors declining to participate, SCS generated orders from 8 different investors totaling $338 million (2.8x oversubscription). This includes an order for the entirety of the BANs from one investor which had originally turned down the credit. Given the oversubscription, we were able to reduce the yield by 5 bps for a final yield of 1.60%.
Five days after the BANs priced, Moody’s downgraded the long-term rating on the District’s outstanding GO bonds to Aa3 (negative), citing further deterioration of Hartford’s credit profile. Following the downgrade, SCS reached out to all buyers of the BANs and confirmed that the negative ratings action would not impact their commitment to purchase the BANs.