Philadelphia plans a dramatic return to the credit markets next Wednesday, following city council approval yesterday of a plan to sell $218 million of bonds -- including a $45 million chunk to be sold on the strength of the city's credit alone.
In a 14-to-0 vote, council members approved a plan to build a new criminal justice complex with the package of issues that will also include $173 million of insured bonds.
City Treasurer Benjamin Blakney said yesterday he believes the deal symbolizes a unique opportunity to begin the long process of bringing the city back into the credit markets, after being shut out by junk bond ratings last summer.
"This represents an effort by the city to bring both feet across the line," Mr. Blakney said, explaining that the insured portion reintroduces Philadelphia in a general obligation context, and the smaller segment reintroduces the city on an unenhanced basis.
But the city treasurer said the deal should be kept in perspective.
"I don't think there's anybody here that thinks there's market capacity to absorb $200 million of Philadelphia lease revenue debt, and I think I would be equally reluctant to say there is capacity to accept the $45 million we plan to do without the context of this particular project," Mr. Blakney said.
The insured portion of the deal will come in two issues, a $133 million piece carrying insurance from Financial Guaranty Insurance Co. and a $40 million piece covered by Municipal Bond Investors Assurance Corp.
The rest, about $45 million of uninsured debt, will be sold without a rating.
"I have pretty good comfort from our institutional people that we can do this," said George Longo, a senior vice president in Kidder, Peabody & Co.'s Philadelphia office, the deal's underwriter. "We don't have any firm orders yet, but the feeling is that Philadelphia is going to be here 20 years from now," so institutional investors should feel secure enough to buy the bonds.
Mr. Longo said the credit market blacklisting that has applied to Philadelphia since last year applies more to the short-term market than the long term, and the 20-year bonds would be marketable at reasonable levels.
Despite months of horrendous nationwide publicity about the city's credit problems, Philadelphia bonds are still trading just below 9%.
City officials, convinced their junk bond ratings have shut them out at least from the short-term market, have been negotiating with local financial institutions for a temporary loan. That loan is needed to get the city through the summer, until a new fiscal oversight authority can prepare a deficit bond deal designed to remedy the city's short-term cash crisis.
The insured portion of the criminal justice complex deal was negotiated by Ralph Saggiomo, another vice president at Kidder.
"It was apparent to us at the outset that the city of Philadelphia would probably not be able to access the capital debt market and move the criminal justice project forward without bond insurance," Mr. Saggiomo said.
Under the terms of the deal, old bonds already insured by the two insurers will be refinanced, with two years of debt service deferred as a result. That deferral will generate a boon of about $63 million to Philadelphia's fiscal 1992 and 1993 budget, according to Mr. Blakney. At the same time, it will also postpone significant exposure to Philadelphia debt for both FGIC and MBIA, providing the insurers with their own incentives to go along with the deal.
The entire deal still must be approved by U.S. District Judge Norma L. Shapiro, who is overseeing the city's compliance with a court order to increase its prison space.
Mr. Blakney and Mr. Saggiomo presented the details of the plan approved by council yesterday at a hearing before Judge Shapiro. Se is expected to hand down a ruling by Monday at the latest, they said.
City officials said the council vote also appears to address initial fears that the deal would fail to win a clean opinion from bond counsel, by clarifying an amendment to the legislation that they initially said could kill the deal.
That amendment granted council members broad authority to approve final plans and budgets for the courthouse and prison complex. Bond counsel on the deal -- Pepper, Hamilton & Scheetz -- warned that such a provision would make a clean legal opinion all but impossible, because it would allow bonds to be sold for a project that could be changed after the tissue was sold, according to city officials.
But resolutions adopted by the city council as part of yesterday's vote restricted that oversight enough to allow the firm to issue the required opinion, according to Mr. Blakney.
"We have been told in no uncertain terms" by bond counsel that they will issue the opinion, he said. Attorneys at Pepper Hamilton were not available for comment.