After a slight delay, Philadelphia yesterday evening priced a $150 million private placement of taxable and tax-exempt deficit notes, a city official said yesterday.
A tentative pricing scale released late last night pegged the tax-exempts at par to yield 7.50%, and the taxable notes priced at par to yield 8.50%, according to Anthony M. Griffith, a vice president at A.H. Williams & Co., the marketing agent on the deal. The Bond Buyer one-year note index was 4.49% last Wednesday.
Mr. Griffith said the order period for the notes, which are due May 12, would run through tomorrow. He added that most of the taxable notes were placed with investors and about one-third of the tax-exempt notes had been sold as of late last night. The city could offer more taxable bonds depending on demand, but the ultimate size of the offering would not change, he said.
The city last sold deficit notes in August, when an unrated and uninsured $100 million was privately placed. The issue had a 9.25% coupon and was priced to yield 10.729%. Those notes are due May 7, 1992. The Bond Buyer's one-year note index at that time was 4.96%.
"From the standpoint of easing our cash problems, I am pleased," said city Finance Director David Brenner. "But it is a very expensive way to do business, and I hope we never have to do it again."
At one point yesterday, the pricing of the note offering was delayed by investors' questions, said Mr. Brenner. Officials with A.H. Williams told him they would hold up the sale until questions from investors about the issue were answered, Mr. Brenner said.
The deal was originally sized at $90 million of tax-exempt deficit notes and earmarked for not-for-profit investors, Mr. Brenner said. But additional interest expressed by investors after the sale announcement spurred city officials to re-configure it as a $60 million taxable offering and a $90 million tax-exempt offeringy.
The taxable portion is earmarked for not-for-profit investors and the tax-exempt notes are being offered to other investors, Mr. Brenner said.
The notes are secured by the city's wage tax and in the event of default investors would be permitted to hold their wage tax payments to the city in lieu of receiving interest and principal payments, Mr. Brenner noted.
The delay was prompted by a number of questions asked by investors about what happens to the notes in the event of a default and if the city seeks bankruptcy protection, Mr. Brenner said.
And those concerns caused some foot shuffling yesterday morning. One official, Bernard E. Anderson, chairman of the Pennsylvania Intergovernmental Cooperation Authority, said yesterday he understood that some of the not-for-profit investors had walked away from the deal.
"I have heard that several of the institutions have pulled out," said Mr. Anderson, adding that he did not know why the investors balked at buying the notes. The authority he chairs was created to sell deficit bonds for the city, but has not yet been called on to do so.
Sources close to the deal said one investor that decided against a note purchase was LaSalle Univerity, which had been considering a $1 million purchase. Mr. Brenner pointed out that investors remain interested but had "legal questions that have to be answered."
With yesterday's offering, there will be approximately $260 million of outstanding deficit notes. Mr. Brenner said. The underlying security for that debt is about $900 million of wage tax revenues expected in the spring. Investors holding the notes that first call on the city's wage tax revenues, and additional security includes a requirement that the city obtain approval from the governor before seeking Chapter 9 bankruptcy protection.
Although the deficit notes sold in August are also secured with wage tax revenues, in the event of default, holders of these notes cannot avail themselves of the option of withholding wage-taxes. However, those investors also have access to the note's sinking fund, Mr. Brenner noted.
Mr. Brenner confirmed that one of the reasons why the deal was being marketed to not-for-profit investors was because A.H. Williams has "a lot of contact with not-for-profits."
The latest deficit note offering, criticized by a number of city officials as skirting financial responsibility, is being sold to provide the cash-strapped city with operating funds.
Critics of the mayor and the note deal have suggested it may be a means to postpone a deficit bond sale by the oversight authority until Mayor W. Wilson Goode leaves office in January. Before the bonds can be sold, the authority's oversight board must approve a five-year financial plan for the city, and critics suggest the note sale would get around the need for developing a tough plan until next year.
City Controller Jonathan A. Saidel said yesterday that he did not approve of the note deal because he wants to "send a clear message to the market that until Philadelphia addresses its long-term problems, short-term solutions should not be bought."
He added, "I think it only hurts Philadelphia in the long run."
Because the new bonding authority has not been asked to help the city, Mr. Anderson said that "it is very frustrating and very disappointing. The city is obviously moving down a road that is not in its best, long-term interest."
The political campaigns and the upcoming mayoral election have distracted city officials from making tough decisions on forming a financial plan, Mr. Anderson said. However, he added, "I remain optimistic that after the election, their attention will return to the city's fiscal problems and resolve this situation."
While some officials have conjectured that a bond sale by the authority may not occur until 1992, Mr. Anderson said he believed it could be done before the end of the year.
Noting he was an appointed official, Mr. Brenner said, "I am not distracted by politics. Bernie Anderson is right -- the long-term financing is still critical."
But because of the city's pressing cash-flow needs, the notes have to be sold, he said. "I have a business to run."
Mr. Brenner then observed, "Sooner or later the politicians are going to face up to the fact that the PICA bonds are going to be sold."
