Philadelphia this week plans to try something it hasn't attempted since the notorious collapse of a 1990 city note sale: attract retail investors to Philadelphia paper.
City officials announced last week they will price a $100 million tax and revenue anticipation note sale on Thursday through a syndicate led by Mellon Bank.
The failure of a similar note sale over two years ago signaled the onset of Philadelphia's fiscal crisis and triggered a series of rating downgrades that locked the city in the junk bond cellar.
Since then, Philadelphia has been forced to rely mostly on expensive private placements to meet short-term cash needs. Its one attempt at a public offering, a $110 million deal in August 1991, was structured to exclude the retail sector.
But this time around the odds are in Philadelphia's favor. In contrast to the failed 1990 deal, the city now boasts a new administration, a new fiscal oversight board, and a new sense of cooperation and recovery. And, more importantly, bankers marketing these notes can point to a letter of credit from an investment-grade bank, Canadian Imperial Bank of Commerce, which is expected to attract both retail and institutional investors to the sale.
The letter means the note deal, rather than carrying the ball and chain of Philadelphia's speculative grade credit, is expected to carry a P1 rating from Moody's Investors Service and an Al-plus from Standard & Poor's Corp.
In addition to issuing a direct-pay letter for a portion of the $100 million deal, Canadian Imperial has agreed to provide a confirming letter of credit, which secures the entire deal in the event any of the five other banks providing direct-pay letters falls to perform. The five other banks are all local institutions, many of which have refused to participate in previous city deals or did so only at extraordinarily high interest rates.
Last year's August note sale was priced to yield 10.7%, but market sources say the new notes are expected to come with a coupon of about 3.7% and a true interest cost of about 4.7%. City Officials said they think they can do even better than that.
By comparison, in late secondary note trading Friday, outstanding Pennsylvania Tans were quoted at 2.88% bid, 2.83% offered, while widely traded New Jersey notes were quoted at 2.85% bid, 2.82% offered. Both credits are rated MIG-1 by Moody's.
Much of the credit for the improved expectations goes to Canadian Imperial's letter of credit, and city officials say securing the letter also bodes well for Philadelphia's recovery prospects.
"It's evidence that sophisticated credit analysts have looked at the city of Philadelphia credit and said they are comfortable making this commitment, whereas a year ago they weren't, " said Stephen P. Mullin, Philadelphia's finance director.
In fact, as soon as city officials announced last summer they were likely to try a return to the credit markets in the fall, Canadian Imperial expressed interest, Mullin said.
As first reported in last week's Philadelphia Business Journal, city officials originally hoped to sell as much as $120 million in notes. The extra $20 million would have been used to effect an early redemption of a portion of a recent note sale privately placed with the city's own oversight board, the Pennsylvania Intergovernmental Cooperation Authority.
The idea was to free up funds for capital projects that the city is eager to begin. But board officials, who have no authority to approve or reject the city's note plans, said they were reluctant to allow prepayment of their loan to make extra capital funds available, in part because Philadelphia has historically been slow in getting capital spending plans under way.
As a result, instead of borrowing the $20 million now as part of Thursday's sale, Philadelphia agreed to wait until the start of the new year to see if its capital spending rate has accelerated to the point where the money would be useful. If it needs extra capital funds then, it can proceed with the early redemption with cash expected to become available later this year.
Ronald G. Henry, PICA's executive director, said the city's note plans seemed to be appropriate, given cash flow needs and alternative borrowing options. "It's time for them to get back in the market," Henry said.
A preliminary official statement for the notes is being circulated today, according to city officials. The co-senior managers are PNC Securities Corp. and RRZ Public Markets Inc., and the co-managers are CoreStates Capital Markets; Fidelity Securities Group; Meridian Capital Markets; Artemis Capital Group; Dillon, Read & Co.; and Boston-based Innova Securities Inc., where former city treasurer Benjamin Blakney now works.