For the first time ever, New York City has obtained a letter of credit for a variable-rate issue with a shorter maturity than the bonds being sold.
Seven letter-of-credit banks backed the city's $305 million issue of 22-to-30 year variable-rate demand bonds, marking the first time the city received a LOC for a long-term variable rate issue.
Price yesterday by lead manager First Boston, yields on the deal -- to be reset daily -- varied based on the credit strength of the LOC providers. The $50 million of bonds backed by a letter from Morgan Guaranty was priced to yield 2.55% and the remainder of the deal was priced at 2.60%, according to a city official.
"The difference in [this] deal and previous deals with the city is that in the old arrangement a three-year LOC could only support a three-year bond, which is atypical for LOC enhancement." said William H. Vogt, vice president in Morgan Guaranty's public finance department. "In the case of New York City, you were not subject to long-term exposure if you couldn't be replaced."
The structure of the city's latest offering stipulates that each bank will have the option to renew its letter - after three years on the five-year letters and after two years on the three-years.
"This is the first time we've done LOCs on bonds longer than the LOCs themselves," said Roger Anderson, bureau chief for debt management in the city's Office of the Comptroller. "We worked out a structure whereby we're putting LOCs on longer bonds and hoping the banks will keep renewing until maturity." Until now, all of the city's LOC-backed debt was short-term and matured at the same time as the letters, so replacement or renewal of the LOCs was not an issue, Anderson said.
New York City has been one of the most prolific users of FGIC Corp.'s Securities Purchase Inc. subsidiary, which offers long-term variable rate liquidity. But the city wanted more liquidity than SPI could supply.
"We've used up all the capacity that SPI would give us," Anderson said. "We're trying to [sell] more variable-rate debt, so we used the same [SPI maturity] format with the banks."
Chemical Bank is providing a $100 million LOC with a renewable five-year maturity, he said. Chemical was the first bank to offer the city the renewal option - one that is familiar to issuers nationwide - and its LOC is separate from the letters of the six-bank syndicate, which is led by Morgan Guaranty Trust Co. and Industrial Bank of Japan, Anderson said.
"Because Chemical's ratings have been upgraded and we see the city as a good credit and a good client," the bank offered an LOC with a "nominal" 30-year term, said David Hack, vice president for Chemical Securities. "As the result of us leading the way, the other banks fell [in] behind us."
Morgan is providing a $50 million letter for five years; Industrial Bank of Japan, $24.6 million for five years; Kredit Bank $25 million backing for three years; Sumitomo Bank, $50 million for five years; Sanwa Bank, $25 million for three years; and Landesbank Hessen-Thuringen, $30 million for three years.
Bank and city officials said the structure is more expensive for the city, but affords it greater security. The annual fees for the letters of credit are 115 basis points of principal and interest for the five-year letters and 70 basis points for the three-year LOCs, Anderson said.
The city also paid upfront fees of 10 to 20 basis points, depending on size and maturity, he said.
If a bank decides not to renew its letter of credit, the city then has time to execute three other options, Anderson said: Replace the LOC, convert to a fixed rate issue, or put the bonds back to the bank and refund the shorter maturities.
Chemical's Hack said the first two options are far more likely to occur.