New York City finance officials are planning two major refundings of outstanding debt in an effort to capitalize on the low yields generated by the municipal bond market's recent rally, city officials and other sources have confirmed.
Officials from the New York City Municipal Water Finance Authority yesterday announced they will refund close to $1 billion of outstanding water and sewer system revenue bonds next week. City officials have termed the sale the largest refunding of debt in the authority's six-year existence.
In addition, the city plans to refund $1 billion of outstanding general obligation bonds the week of Aug. 10, using Lehman Brothers as the deals' lead manager, the city announced in a press release. The city appointed Goldman Sachs & Co. and Merill Lynch & Co. as cosenior managers.
"All three firms submitted unsolicited proposals to the city and have worked closely with the city to develop this refunding," according to a statement the city released late yesterday.
"These refundings expect to take advantage of the lowest interest rates in the municipal capital markets in decades," the statement continued. "The city and the authority both expect to achieve significant interest cost savings."
Most details concerning the GO issue were not available yesterday afternoon. But city sources said the structure will feature serial bonds ranging from two to 30 years in maturity. As currently constituted, the deal would be the largest refunding in city history and the fourt-largest refunding ever, according to Securities Data Co.
Despite yesterday's spike in yields, market observers said the timing of both deals reflects simple market logic: the replacement of old, higher-coupon debt with new bonds priced during one of the strongest rallies the municipal bond market has witnessed in years. For example, The Bond Buyer's 20-year bond index closed yesterday at 5.89%, its lowest level since 1978.
"Rates are so low; it's obvious what they're doing," one investment banker said. The banker termed the sale a simple "high-to-low refunding." This market term describes the replacement of higher-coupon debt with debt sold at lower coupons, as opposed to other refundings often designed to change the maturity structure of outstanding debt or to replace bond covenants.
Alan Anders, the water authority's treasurer, said the refunding will produce a present-value savings of more than 5% of the total sale. "We are refunding a little under one-third of our outstanding debt." Mr. Anders said, adding that the maximum yield on the old debt is about 7.10%. Mr. Anders expects a maximum yield of 6.25% on the new issue.
The water authority will sell the bonds through a syndicate headed by Smith Barney, Harris Upham & Co. The syndicate is expected to price the bonds on Tuesday. The issue will be the third refunding of bonds for the water authority.
In an unusual move, the authority added two firms to its co-senior manager group, which has in the past consisted of Morgan Stanley & Co. and Paine Webber Inc. The authority also added one firm to its usual seven-member co-manager group.
During the upcoming sale, Dillon, Read & Co. and Prudential Securities will join the co-senior manager group, which represents the second tier of underwriters for the deal. Reinoso and Co., a minority firm, will join the deals third tier, known as the co-manager group. Mr. Anders said the city is rewarding the firms for "their research help."
