Oakland USD, 2015 GO Bonds

Oakland Unified School District

$173,500,000
General Obligation Bonds (Election of 2012),
Series 2015A
$6,500,000
General Obligation Bonds (Election of 2012),
Series 2015B (Federally Taxable)
$168,705,000
2015 General Obligation Refunding Bonds

SCS leads largest and 3rd non-rated GO Bond transaction for Oakland USD

Executive Summary
The Oakland Unified School District 2015 General Obligation bonds priced on August 5, 2015 after an in depth pre-marketing process. This is the 3rd non-rated and largest transaction our firm has senior-managed for the District. Our previous experience positioned Siebert Cisneros Shank well to navigate the universe of investors to identify a broad group that understood the District’s underlying credit. Through the focused attention on investor education regarding the District’s improving finances as well as the potential impact of new California bankruptcy legislation, this transaction eclipsed the pricing performance of comparable transactions.

The proceeds of the Series 2015A and 2015B Bonds were used to fund projects from the Election of 2012 Measure J bond measure. The 2015 Refunding Bonds were issued to current refund the Series 2002 and 2005 Bonds for debt service savings. As with the previous two District transactions, these bond issues were non-rated due to the District not being current with its audited financial statements.

Background
Between 2013 and 2015, the District hired an auditor to audit its financial statements through the 2013 fiscal year,
Subsequent to the California State Controller’s Office completing the fiscal year 2010/11 audit of the District’s financial statements in June 2013, the District’s Board authorized the hiring of Vavrinek, Trine, Day & Co., L.L.P. to conduct the District’s financial audits for the 2011/12, 2012/13, and 2013/14 fiscal years. The fiscal year 2011/12 and 2012/13 audits were completed in November 2014 and July 2015, respectively. The number of findings in said audits declined from 44 in fiscal year 2010/11 to only 13 in fiscal year 2012/13. Through the Education Audit Appeal Process the District resolved almost all audit findings through the 2012/13 audit with minimal financial impact. Continuing this momentum, at the time of pricing, the District expected to be current with its audits in December 2016 and to at that time consider seeking a credit rating. Siebert Cisneros Shank incorporated the positive audit trends and results into a comprehensive investor marketing plan that ultimately resulted in strong pricing for the 2015 Bonds.

Investor Marketing
As the pricing of the District’s bonds approached, Siebert Cisneros Shank formulated an in-depth investor marketing plan that capitalized on the firm’s prior experience selling the underlying credit of the District. At the heart of the investor marketing plan was the foundation of the credit—a “lock-box” ad valorem tax collection and repayment system bolstered by consistently strong growth of the diverse tax base. Immediately prior to the launch of the investor marketing program, California Senate Bill 222 (“SB 222”) was passed and further strengthened the District’s General Obligation credit. At the time of pricing, the passage of SB 222 was expected to result in the creation of a statutory lien on ad valorem taxes levied to pay debt service for general obligation bonds sold by school districts after January 1, 2016. For bonds issued prior to January 1, 2016, such as the 2015 Bonds, a bankruptcy court may conclude that the lien only attaches to ad valorem taxes levied and collected after January 1, 2016. Siebert Cisneros Shank, in consultation with Bond Counsel and the District, incorporated language about the impact of SB 222 into the Preliminary Official Statement and endeavored to communicate the resultant additional bankruptcy protection as a key selling point to potential investors.

To allow investor analysts and portfolio managers ample time to review the District’s credit, recent successful audit history, and the impact of SB 222, the Preliminary Official Statement for the 2015 Bonds was released a week and a half prior to pricing and SBS circulated a detailed internal sales memo that highlighted credit strengths and potential risks of the bonds. Our firm also circulated a “Save-the-Date” notice for an investor luncheon that would be held in New York City two days before the sale of the 2015 Bonds. At the investor luncheon the District, Siebert Cisneros Shank, KNN Public Finance, and Orrick, Herrington & Sutcliffe, presented to several investor analysts from large and active municipal bond funds, including Citi, which ultimately submitted a $30 million order for two maturities in the, oftentimes difficult to sell, “belly of the curve.” Recognizing that many investors would prefer to ask questions privately to District officials, Siebert Cisneros Shank also coordinated and facilitated 28 one-on-one calls between the District and potential investors. Of those calls, 19 were with institutional investors that were not current holders of the District’s bonds. In addition, 3 of the one-on-one calls were with investors that were holders of the District’s Series 2002 and 2005 Bonds. As a result of the one-on-one calls and the investor luncheon, a total of 33 institutional investors participated in the marketing effort and ultimately submitted over $1.2 billion orders. In total, these going away orders would have been sufficient to sell every maturity without consideration for any other buyers.

Market Conditions
In the weeks leading up to the sale of the 2015 Bonds municipal supply became more favorable as volume began to decline in a pattern that is consistent with historical norms. Supply in July and early August was approximately 5% above the 10-year average and down 11% compared to the month of June. Refunding volume began to decline in June and that trend continued in July, declining 5.6% to $10.36 billion in 310 issues, from $10.98 billion in 344 issues. New money issuance, however, increased throughout July for the second consecutive month, rising 26.6% to $15.05 billion in 553 transactions, from $11.88 billion in 446 transactions during the same time frame last year. Combined new money and refunding transactions, such as the District’s 2015 Bonds, increased by 9.7% to $5.34 billion from $4.87 billion. As compared to July 2014, in July 2015 General Obligation bond sales rose by 17.8% to $12.4 billion, tax-exempt bond sales increased 7% to $26.94 billion, and taxable bond sales saw a 47.3% increase to $2.96 billion. Compared to June 2015, in July 2015 deals with bond insurance increased 5.3% to $1.61 billion from $1.52 billion.

Through the week ending August 5th, the day that the 2015 Bonds priced, municipal bond funds had outflows of $308.2 million according to Lipper data. In the week prior to that outflows totaled $73.4 million. On the day of pricing, the four-week moving average of fund flows was negative, at $71.4 million, for the eleventh week in a row. High-yield municipal bond funds reported outflows of $57.8 million after outflows of $10.2 million the previous week.

Despite the net outflows reported by municipal bond funds, the seasonal reduction in municipal volume coupled with the District’s unique credit story and robust investor marketing effort set the stage for Siebert Cisneros Shank and the District to open the order period with spreads to MMD that were 25 to 17 basis points lower than pre-marketing consensus price views levels.

Pricing Results
At the conclusion of the order period, the District received over $2.07 billion orders from 57 investors, resulting in total oversubscription of available allotments of $1.7 billion. 99.2% of the orders were priority orders generated by Siebert Cisneros Shank. Throughout the pricing period SBS leveraged the high demand from investors as well as negotiations with three bond insurance firms to drive yields for the 2015 Bonds lower. SBS reduced spreads by 10 basis points for the highest in-demand 2040 term bond and by 3 to 8 basis points for the serial bonds. On the refunding series, Siebert Cisneros Shank successfully negotiated with the largest municipal bond insurer to reduce the cost of the insurance premium by 5 basis points, thereby enabling the 2021 to 2030 maturities of the refunding bonds to be insured with yield savings of 10 to 13 basis points.

The aggressive marketing program, superior bond underwriting and structuring, market timing and teamwork enabled the District to finance a project fund of $180.0 million and generate net present value savings of $20.5 million, or 10.9% of refunded Series 2002 and 2005 par amount, at an All-in TIC of 3.45%. The average life of the 2015 Bonds is 12.2 years.

The final spreads to MMD for the 2015 Bonds ranged from 55 basis points on the 2016 maturity to 115 basis points on the 2032 maturity of the uninsured new money bonds. Spreads on the insured bonds ranged from 72 basis points on the 2021 maturity to 90 basis points on the 2030 maturity. These spreads were up to 55 basis points tighter than other recent non-rated California transactions and only 55 to 82 basis points wider than other California AA-rated School District General Obligation bonds. Similarly, the District’s insured refunding bonds priced comparatively well, being only 8 to 39 basis points wider than other recent insured transactions of California issuers with underlying ratings. Compared to the District’s 2013 and 2012 non-rated transactions, the 2015 Bonds priced exceptionally well with spreads that were up to 80 and 105 basis points tighter, respectively.