Philadelphia officials say the safety cushion is a lot smaller than they hoped, but the $41.6 million raised in their recent note sale should be enough to take the city through its latest cash crunch.
The final sales figure for the note sale, which closed Friday, is less than half the $90 million city officials originally wanted, and well below the $150 million that backers of the deal thought they could muster at one point last month.
But city Finance Director David Brenner said the money will be enough to take Philadelphia to February, when tax revenues start flowing into the city's general fund. "It's just going to be a lot tighter" than officials were hoping, he said.
Anthony M. Griffith, a vice president at A.H. Williams & Co., the deal's underwriter, said the goal was to bring Philadelphia through its annual fall cash imbalance and to smooth the way financially for Mayor-elect Edward G. Rendell, who takes office in January.
"We think we have been able to accomplish that, but we haven't been able to provide the cushion we wanted," Mr. Griffin said.
A major problem was a lack of support from the city's corporate and banking institutions, sources involved in the deal said.
The sale was split into taxable and tax-exempt portions, with the taxable side marketed to nonprofit institutions that could benefit from the higher yield without having to pay taxes on the income. Twelve institutions bought a total of $34.4 million of taxable notes at an 8 1/2% yield, Mr. Griffith said.
The remaining $7.2 million went to a single tax-exempt investor at a rate of 7 3/4%.
Mr. Griffith said press reports about raising the size of the deal to $150 million mistakenly gave the impression that Philadelphia needed the higher amount to avert insolvency. He said the idea was merely to give the city as much breathing room as possible.
One handicap to selling more notes was a $100 million short-term deal the city closed earlier this year that carried double-digit yields. Mr. Griffith called those terms "astronomical," but he said national investors were demanding that the new notes carry those kinds of rates as well.
City officials decided to hold the line this time around, and accepted a smaller deal to avoid setting that kind of yield precedent again, Mr. Griffith explained.
Municipal analysts say Philadelphia is about at the end of its rope in devising strategies that can attract meaningful support from short-term investors, regardless of yield. The most recent note deal, for example, was structured as a kind of tax prepayment plan for investors. Local institutions which buy the notes are permitted, if the city fails to pay principal and interest, to withhold future wage tax payments in amounts equal to the missed debt service.
John Foos, chief financial officer for Blue Cross/Blue Shield in Philadelphia, which bought $5 million of the taxable notes, said that provision was the only reason Blue Cross agreed to loan the junk-rated city money.
About the only risk to investors, other than a legal challenge to the structure of the deal, would be a Chapter 9 bankruptcy filing, analysts said. While that can never be ruled out entirely, investors in the note deal and other municipal finance experts say the possibility of such a filing is extremely remote.
One reason is that the enabling legislation for the city's new oversight authority has specific prohibitions against a Chapter 9 filing.
For now, the legislation requires the unlikely approval of the governor before a filing could be made. And once the oversight board, the Pennyslvania Intergovernmental Cooperation Authority, sells deficit bond on the city's behalf, bankruptcy is forbidden under any circumstances while the bonds are outstanding.
"That in and of itself has led me to believe that the likelihood of going into Chapter 9 currently is very remote," Mr. Foos said, echoing the feeling of several other investors in the note deal.
