SCS’s experience and in-depth knowledge of the District’s credit were instrumental in navigating a volatile market environment
In April 2018 Siebert Cisneros Shank served as the book-running senior manager for SCS’s fourth senior managed transaction for the District. The firm’s experience and in-depth knowledge of the District’s credit were instrumental in navigating a volatile market environment underpinning the lead up and pricing for the transaction. Given the changing municipal bond landscape in the post-tax-reform environment, the transaction was structured to allow the District to maintain as much financial flexibility as possible with short call features. Despite the volatile market and atypical call structure, the bond sale was a complete success, allowing the District to grow its world class medical services with the addition of a Women’s and Children’s Tower to be financed with these bonds.
The bonds are secured by a limited ad valorem tax and a limited pledge of the District’s excess revenues. This strong credit backing earned the bonds underlying ratings of Aa1 and AA+ by Moody’s & Fitch, respectively. The bonds were structured with serial maturities from 2019 through 2038 and term bonds in 2043 and 2048. Maturities from 2029 – 2030 were structured with a 5-year par call, the maturities from 2031 – 2031 with a 7-year par call, and the 2028 and 2033 – 2048 maturities were structured with a 9-year par call. The amortization structure of the bonds is such to generate a level tax rate for the District through 2048.
After the elimination of tax-exempt advance refundings resulting from the Tax Cuts and Jobs Act, the District wanted to have a bit of financial flexibility through the implementation of shorter calls in the structure. Rather than the typical 10-year par call feature of the other non-short-call maturities, SCS suggested that a 9-year par call feature would not incur any additional pricing premium over a 10-year par call feature. As the municipal bond market continues to evolve after tax reform, these shorter call features are starting to become more commonplace and SCS’s experience with these deals has helped the firm better understand the investor base looking for these shorter calls. To help with the marketing of these shorter call structures in a volatile market, the District was able to get the POS out nearly two weeks before pricing since there was a holiday shortened week the following work week. This early release allowed potential investors ample opportunity to review the credit and in that time, the District fielded questions from four investors interested in the transaction, Alliance Bernstein, JP Morgan Asset Management, Northern Trust, and Cap Re.
The volatile market saw the equity market up and Treasury market down one day to reverse the next day. The week of pricing represented the second largest volume for the year at $7.59 billion. It began with a relatively stable Treasury market on Monday with the 10-year Treasury lower by 1 basis point. However, on Tuesday, the Treasury market reversed course and ended the day lower with interest rates increasing by 6 basis points for the 10-year Treasury. This adversely impacted a Little Elm ISD ULTGO transaction priced on Tuesday which would then serve as a barometer for the District’s pricing. As the market opened on Wednesday, equities, as measured by the Dow Jones Industrial Average, were down 500 points but looking to find its footing. The market had been volatile due to various international factors, dominated by a potential trade war and increased tariffs. Equities soon found a bid and began to stage a comeback early in the morning bringing further volatility. For the order period, SCS recommended a strategy that involved building up a large book of orders before becoming aggressive in the re-pricing to reduce pricing spreads and interest rates.
As the order period commenced, orders for the belly curve were starting to get filled with the front end and later serials getting most of the attention. At the end of the order period, nearly every maturity was oversubscribed, by as much as 4.1x on a priority basis, except for three maturities including the two term bonds. With the strong book of orders, SCS recommended the District lower pricing spreads 2 – 3 basis points in twelve maturities. For the areas of the curve that were undersubscribed, SCS had to increase pricing spreads by 1 basis point in the 2037 and 2038 maturities, and 5 – 6 basis points in the 2043 and 2048 term bonds. The final re-pricing included bifurcating the 2037 maturity to include a 5% coupon as well as the 4% coupon initially offered. After re-pricing, several investor accounts dropped from the transaction and SCS stepped up to underwrite $13.975 million of all the unsold bonds for the benefit of the District. These investors had dropped due to the pricing adjustments for their maturities not being relatively equivalent to other maturities and in light of what had now been a complete reversal of the equity markets. The intraday recovery sent the DJIA on a 700 basis point swing and ended the day up 200 points.
SCS’s sales desk generated $407 million of priority orders representing 95% of the total priority orders submitted by the underwriting group. There were 44 investors that submitted orders with 38 potentially new investors. Six of the investors were either (1) current holders of the District’s bonds, and/or (2) put in orders in the District’s previous deals. Of the four investors that submitted questions, three of them submitted orders with Cap Re being the largest investor at $45.3 million spread throughout nine maturities.