Capital Guaranty Insurance Co. is about to make its first significant mark on the municipal market since it received an Aaa rating from Moody's Investors Service in June.
The company is expected to back about $175 million of an intricate, pooled borrowing for assessment districts in the East Bay area near San Francisco. The tax-exempt deal, to be issued by the Pleasanton Joint Powers Finance Authority, uses a technique more familiar to structured finance than traditional municipal borrowing.
The Pleasanton authority plans a $250 million reassessment revenue bond sale with a senior/subordinate structure. The deal is expected to be priced today or tomorrow, according to Steven McClure, a vice president at Capital Guaranty.
The sale will mark only the second time that assessment bonds have been sold with a senior/subordinate structure, and it will be the largest refunding of such bonds, an investment banker familiar with the deal said. Late last month, the Vallejo Public Financing Authority assessment district sold a $20 million offering that contained about $15 million of senior securities and $5 million of subordinated debt.
"We have a commitment letter out on it," McClure said. "We have an exclusive on it in terms of the insurance, but that doesn't rule out that they may do it uninsured."
The bond insurance official said it was "likely" that Capital Guaranty would insure the senior piece. At $175 million it will be one of the largest deals the firm has ever insured in the primary market.
Moody's has rated the underlying Pleasanton bonds Baa. A rating from Standard & Poor's Corp. was pending at press time.
The investment banker, who asked not to be identified, said the use of the senior/subordinate structure is expected to become more common in California because Mello Roos and assessment districts must hold public hearings before they sell refunding bonds for more than the principal amount of the original issue.
The assessment and Mello Roos districts get around that requirement by issuing refunding bonds and then selling them to joint power authorities.
The authorities then sell revenue bonds in greater amounts than the districts' original issues and turn the proceeds over to the districts, the banker said.
Capital Guaranty's McClure said the Pleasanton issue would not have received an investment grade rating without the excess debt-service coverage provided by the subordinate bonds. The rating is "subject to elevation depending on how much senior and subordinate bonds the underwriter is willing to [sell]," he said.
The investment banker said high-yield fund groups that normally buy unrated Mello Roos or assessment bonds are expected to buy the subordinate series. There is no rating on the subordinate piece, and Capital Guaranty will not insure any of the series B issues, the banker said.
The revenue stream for the bonds comes mainly from the assessment on the property which, in this instance, is levied on a per-acre basis, McClure said. Assessment taxes are collected with the property tax, so there is "a lot of strength in the collection method," he said.
Interest and principal payments on the senior, or series A, bonds are paid first when money flows into the pool, McClure said. Any reserve fund deficiencies on the senior bonds will be paid next, followed by principal and interest payments on the subordinate, or series B, issues and reserve fund deficiencies.
Prudential is the major property owner in the assessment district, much of which is "unimproved," McClure said. Most of the development is expected to be light industrial or commercial.
The surrounding area consists of "upper-end" housing and a shopping center with major national chains. In addition, a line of the Bay Area Rapid Transit, or BART, system is slated to be built into the area that would directly connect it to metropolitan San Francisco.
