LOS ANGELES -- In an innovative use of the Marks-Roos bond pooling act, a financing authority in Orange County, Calif., yesterday refunded the outstanding debt of eight Mello-Roos districts and issued new-money bonds.
The financing apparently marks the first time that the 1985 act for refundings of land-backed debt -- such as Mello-Roos and assessment bonds -- has been accomplished without a senior-subordinate legal structure, market sources said.
Included in the $241.3 million issuance of special tax revenue bonds, 1994 Series C, is about $50 million of proceeds to pay for new infrastructure in six of the refunded districts. The issuer is the South Orange County Public Financing Authority, a joint powers authority controlled by county supervisors.
The issue's longest-dated term bonds, maturing in 2019, were priced as 6s to yield 6.15%, said a banker who worked on the transaction but asked not to be identified.
About $100 million of the issue was sold as derivatives, the banker said. "To my knowledge, this is the first Mello-Roos refunding to incorporate" derivatives, the banker said.
"I think the deal went very well," he said. The bonds are scheduled for delivery Aug. 24.
The issue was underwritten by senior manager PaineWebber Inc. and co-manager Stone & Youngberg.
"There were a few serials that PaineWebber and Stone took into inventory, but it was a relatively minor amount," said Peter Conlon, senior staff analyst for Orange County.
Until this transaction, using the Marks-Roos Local Bond Pooling Act of 1985 had been accomplished through the senior-subordinate structure.
The senior-subordinate structure requires the use of non-rated junior lien bonds to raise the credit quality of the senior portions to investment grade.
The bonds were rated Baa by Moody's Investors Service, while Standard & Poor's Corp. assigned a BBB underlying rating. The so-called SPUR rating reflects Standard & Poor's analysis of the credit without bond insurance.
The authority obtained credit enhancement from a bond insurer, Financial Guaranty Insurance Co., which allowed investors to buy triple-A-rated bonds.
"The reason this deal works is the authority will pay a triple-A insured rate, which is a lower overall interest rate than it would have paid if it came to market as a BBB/Baa issue," said Eric Shapiro, a FGIC director who oversees the firm's general obligation, lease, and education group.
"This is the first Marks-Roos financing we've done," Shapiro said. "It is a little bit unique in that there is no senior-subordinate structure. All of the districts are strong enough on their own so that we're comfortable with the level of coverage provided."
Conlon of Orange County said insurance was obtained after an analysis determined that "there would be sufficient savings to warrant the premium paid on the insurance."
From the public policy perspective, authority officials have "reduced the long-term debt service, which means lowering the total amount of tax money" that must be paid on the newly issued bonds, Conlon said.
Moreover, the new-money portion will "accelerate funding of needed public facilities which would have been delayed had we not done this," Conlon said.
Projects include two libraries, a sheriff's substation, school facilities, and portions of two fire stations.
The Orange County financing is the latest in a series of recent Marks-Roos refinancings of assessment district debt and so-called community facilities districts formed under the Mello-Roos Community Facilities Act of 1982.
The Mello-Roos act allows a district to be formed with a two-thirds vote of the qualified electors within the proposed district, and then it may issue bonds and levy and collect special taxes to repay its bonds.
Orange County has 16 Mello-Roos districts. In March, Orange County used a Marks-Roos financing to refund debt issued by a Mello-Roos district in Aliso Viejo. The deal was accomplished using a senior-subordinate structure.
In contrast, yesterday "Orange County was able to get the whole senior lien rated," meaning junior lien bonds were not necessary, the banker said.
According to the banker, a senior-subordinated structure would have increased the county's costs of borrowing by approximately 25 basis points a year.
In addition to interest cost savings, the composite issue structure, which permitted the refinancing of eight independent districts, realized economies of scale.
The banker said that some of the districts "could not get rated by themselves, but by combining eight districts [the authority is] able to get the whole thing rated as senior lien debt.
"Savings to property owners are dramatically increased by getting all of this insured," the banker said.
In a press release, Standard & Poor's said that its BBB underlying rating reflected the reliability of the payment stream to the authority by the eight districts whose bonds were refunded.
The districts are located mostly in a wealthy area of the south-eastern foothill portion of Orange County, Standard & Poor's said.
"Some concentration in the tax-payer base, and weak value to lien ratios" are "offset by relative strong [debt service] coverage and a substantial reserve fund," the rating agency said.
In some of the districts, a toll road is under construction called the Foothill Transportation Corridor. The road's first segment recently opened.
If legal challenges prevent the toll road from proceeding as planned, it "might affect future growth" in some districts, said Daniel W. Stone, an analyst with Standard & Poor's. But that scenario was factored into the rating analysis, and existing roads now provide "commute times that aren't unreasonable," he said.
Moody's is "seeing a lot of the refunding market disappear right now," said Nikolai Sklaroff, a Moody's assistant vice president. The exception to that trend is issuers using the Marks-Roos structure to "achieve savings" by refunding Mello-Roos bonds, he said.
