Transaction is accelerated to mitigate exposure to potentially negative impacts of tax bill in 2018
The City of Philadelphia’s Airport Revenue and Refunding Bonds, Series 2017A&B were sold in a negotiated sale led by Bank of America Merrill Lynch and Siebert Cisneros Shank as joint-senior managers in December 2017.
The Bonds were issued to accomplish a number of important goals for the City and Airport including: funding over $334 million in capital projects, retiring $126 million of outstanding commercial paper, refinancing over $226 million of outstanding bonds for savings, replacing existing Sinking Fund Reserve surety policies with cash, and instituting several springing modifications to the Airport’s General Aviation Revenue Bond Ordinance.
Following the official mandate in March 2017, the transaction was soon delayed due to changes in the Airport’s need for capital funds and the City’s busy summer issuance calendar.
This timing met another stumbling block, when, in early November, the US House of Representatives released a tax proposal that would end the tax exemption for Private Activity Bonds, such as the AMT Bonds to be issued by the City. To mitigate the City and Airport’s exposure to this risk, the Joint Senior Managers proposed two alternatives: 1) accelerate the transaction schedule to close by year end; or, 2) execute a bank-purchased multi-modal interim financing by year end with the plan to remarket the debt into long term bonds when ready in 2018. After conferring with its advisors and legal team, the City and Airport elected to pursue an accelerated financing schedule which would price and close the Bonds prior to the end of December.
The potential impact of the proposed tax reforms caused a rush-to-market by many municipal issuers, resulting in a dramatic rise in supply and disrupting the primary market. Given the expectation for over $20 billion in new issue supply during the week of December 11th, the Joint Senior Managers suggested the City post notice of the issuance to EMMA prior to posting the POS.
To enhance the marketing efforts, Siebert Cisneros Shank adapted the rating presentation to create an online investor presentation. Interest from investors was robust with 51 different investor firms viewing the online investor presentation. Additionally, 5 investors had separate one-on-one calls with the City and Airport’s management teams.
The Bonds were structured as serial bonds maturing 2018 – 2037 with term bonds in 2042 and 2047. During the price views and pre-marketing process, the Joint Senior Managers, in consultation with the City, the Airport and their Financial Advisors, elected to open with a scale with long-term credit spreads of +55 for the non-AMT bonds and +80 for the AMT bonds.
Further, by incorporating insurance on several maturities, the Joint Senior Managers were able to ensure demand in what can be a challenging part of the yield curve and thereby put supply pressure on the other parts of the transaction.
At the conclusion of the order period, the Bonds received over $6.4 billion in priority orders. Importantly, the orders were spread across the transaction with subscription levels ranging from 1.2x to 16.2x. As a result, the Joint Senior Managers proposed lowering yields by as much as 15 basis points. Ultimately, the City and Airport were able accomplish all of their objectives, secure an all-in TIC on the bonds of 3.69% and capture present value savings of $34.3 million dollars or 15.7% of refunded par.