NYC TFA Future Tax-secured Subordinate Bonds, Fiscal 2017 Series A

New York City Transitional Finance Authority

Future Tax Secured Subordinate Bonds
Tax Exempt Fiscal 2017 Series A-1 ($800 million)
Taxable Fiscal 2017 A-2 & A-3 ($250 million)

The week of July 11th, 2016, as senior manager Siebert Cisneros Shank priced New York City Transitional Finance Authority’s $800 million tax exempt bonds via a negotiated offering. The Authority also simultaneously sold $250 million of taxable Future Tax Secured Subordinate Bonds through competitive bidding.

The proceeds of the Fixed Rate Bonds will be used to finance general City capital expenditures and pay for certain expenses in connection with the issuance of the Fixed Rate Bonds. The Bonds are payable from  tax revenues, which consist of personal income tax and sales tax revenues. The Act provides that the Authority’s tax revenues are not funds of the City.

The taxable bonds were separated into two tranches, designated Subseries A-2 and A-3. Subseries A2 is a non-callable tranche of bonds maturing within 10 years and Subseries A-3 is callable with two maturities, in 2027 and 2028. The Authority offered its negotiated bonds to retail investors on July 11th and July 12th, and on July 13th the bonds were sold to institutional investors.

Pricing detail
In mid-June interest rates were already at or near historic lows, before the unexpected decision by the United Kingdom to leave the European Union in its June 24th referendum caught global capital markets by surprise. This drove investors into safe havens. The municipal market experienced a significant inflow of demand in the wake of the Brexit vote and the triple-A municipal indices (MMD) were adjusted between 6 and 17 basis points lower the day after Brexit. In the weeks following Brexit and leading up to the Authority’s transaction, municipal market yields continued their downward trend while muni supplies dwindled in part due to the July 4 holiday/short week. TFA entered the market as the first issuer with a substantial bond size since the Brexit vote and sought to capture favorable market momentum.

Retail Day-1: The retail pricing was developed in consultation with the Authority’s financial advisors based on recommendations from the senior book-running manager and price views from the underwriting syndicate consisting of 32 managers. The retail scale generally reflected either the consensus views or between 1 to 3 basis points lower in spread. In addition, as consistent with the Authority’s past practice, the 2018 maturity was not offered, and was instead reserved for sealed bid later in the process. Only the 2019 maturity had a split-coupon structure, consisting of 4% and 5% coupons. In addition to the standard 5% coupon bonds, an array of sub-5% coupons, including 2.50%, 3%, 4% were offered in various part of the curve in order to test the market’s demand. Also, bonds maturing in years 2030 through 2034, 2039, and 2041 were not initially offered during the first day retail order period.
Within the first hour of the retail order period, accounts had placed over $65 million in total orders with oversubscription in both the 2021 and 2027 maturities. By 2:00pm, accounts had placed more than $189 million in total orders, with subscription levels at 2 times or higher in the 2021, 2024 and 2027 maturities. After reviewing the flow of orders and at the recommendation of the lead manager, the Authority and its advisors agreed to close these maturities along with the 2028 maturity, which was 1.7 times oversubscribed. The Authority also agreed to close out any maturities once they reached 2 times over subscription during the rest of the retail order period. Due to strong demand for and near full subscription of the $36.3 million balance in the 2029 maturity, the Authority also agreed to open up the 2030 maturity for retail orders in early afternoon. At the close of the Day-1 order period, $211 million in total retail orders were received and SBS closed an additional maturity to additional orders, in 2023, due to oversubscription.

Retail Day-2: At the close of the first day of the Retail Order Period, MMD was increased in yield by 1 to 2 basis points from 2022 to 2046, which was a response to general weakness in the US Treasury market. That weakness, however, greatly increased as the market opened on the second day of the Retail Order Period. This caused the long bond to open up 2 points cheaper that morning. Yields on the previously closed maturities were kept at the current level and yields in maturities from 2029 to 2046 were increased 1 to 2 basis points in order to track the movement in MMD. The sole remaining open maturity in years 2021 to 2028 was also closed and its yield was kept at the same level. After opening up the order period, retail investors were somewhat hesitant to place large orders given the weakness in the market and the relatively aggressive pricing stance – something that both SBS and the Authority generally expected. At the close of the retail order period, a total of $231.3 million orders were placed.

Institutional Order Period: The market opened with a positive and stable, but reserved tone the morning of the Institutional Order Period. The Authority and Siebert Brandford Shank sought to both maintain the retail order period momentum and attract significant institutional demand in bonds maturing between 2030 and 2042, where sizable balances remained. Yields were adjusted throughout the structure to more closely align the institutional scale with the prior day’s adjustments to MMD, which ranged between a 2 to 6 basis point increases in yield for bonds maturing in 2022 and longer. To maintain the yield integrity, yields were increased in the previously closed maturities between 2021 and 2028 by 1 to 4 basis points, despite oversubscription during the retail period, with the exception of the 2021 maturity where yields were reduced by 3 basis points. The increases, however, were less than the adjustments made in MMD. The most significant adjustment in MMD occurred on bonds maturing in 2031 and longer, with yields increasing by 6 basis points. However, from Friday July 8th through Tuesday July 12th, yields on the long maturity MMD increased by 7 basis points, a lower adjustment than the 13 basis point increase seen in comparable Treasury maturities. Given the lag in MMD, Siebert Brandford Shank proposed price adjustments consisting of a combined 2-3 basis point adjustment for MMD under-adjustment and 2-3 basis points of retail-to-institutional price adjustment for a total of 4-6 basis points in spots. These adjustments generated enough institutional participation from a wide range of investors and a solid book of business averaging 2-3 times subscribed for in the larger maturities and ultimately allowing Siebert to bump yields by 2-4 basis points. Following repricing, a total of $2.3 billion orders were placed against the transaction par of $800 million, of which $1.6 billion were net designated orders placed by institutional investors and $227.7 million were retail orders.