LOS ANGELES -- The San Jose Redevelopment Agency plans today to price an unsually large issue of tax allocation bonds, partly to lock in favorable terms before California's redevelopment reforms take effect on Jan. 1.
The $700 million bond sale will allow the agency to deposit about $442 million in an escrow account to refund all its outstanding tax allocation bonds; refinance $37 million of commercial paper notes; and raise about $190 million in new money for various projects.
Other proceeds from the transaction, which is being underwritten by a team led by Merrill Lynch & Co., will cover issuance and insurance costs.
The refunding portion of the sale is expected to help lower the agency's interest rates and produce net present savings exceeding $10 million.
But lower rates are not the only factor driving the sale. Agency officials also want to lock in a maturity structure for the bonds that will be otherwise constrained once the state's redevelopment reforms take effect.
The reforms, made law this fall by passage of Assembly Bill 1290, impose new time limits on redevelopment plans and on incurring and repaying debt.
Bond sales in place before Jan. 1 escape the law's tightened limits on bond repayment schedules. The limits its vary depending on when a redevelopment plan was adopted.
In general, redevelopment agencies that issue debt before Jan. 1 have a window of opportunity to sell bonds with longer maturities, which can either lower annual debt service payments or raise more money than would be possible with a shorter amortization period.
The effective date for the reform law "is one of the reasons we're in the market now," James Forsberg, assistant executive director of the San Jose agency, told institutional investors during a conference call presentation on Monday.
The deal extends the maturity schedule on the San Jose agency's bonds to the year 2024, rather than the current 2011.
And if they have not already done so, some other California redevelopment agencies also are expected to authorize debt this month to avoid the new restrictions. For example, the Rosemead, Calif., Redevelopment Agency recently structured a deal to extend its final bond maturity to 40 years.
Mutual fund portfolio managers yesterday expressed interest in the San Jose transaction. Some thought the pricing could be more aggressive than generally expected. but they also said the size of the deal may temper any attempts to push rates too low.
In addition, one manager observed, the Los Angeles Community Redevelopment Agency is accepting bids this coming on $273 million of tax allocation bonds. The fact that the market is being asked to absorb almost $1 billion of redevelopment debt in one day could keep the pricing from getting too aggressive, especially given the market's recent skittishness, the manager said.
From a credit standpoint, investors expressed comfort with the San Jose agency because of the track record and diversity of its 15 merged project areas.
The bonds are secured by the so called tax increment that is generated by the agency's redevelopment efforts.
The San Jose agency's tax increment revenue is projected to be $69 million in the current fiscal year, which ends next June 30. That revenue grew steadily during the 1980s, and this year's figure is more than double the $30.1 million collected in 1984.
But the pace of growth, in both revenue and assessed values, has slowed considerably in the last couple years because of the state's recession.
Nevertheless, Standard & Poor's Corp., which assigned an A rating to the bonds, said the outlook for the San Jose agency is stable.
"The size and depth of the merged project area provides a stable revenue stream and sound debt service coverage despite the downturn in the California economy," the rating agency said in a release yesterday.
San Jose redevelopment officials stressed the economic diversity of their various project areas in the pitch to investors on Monday.
Forsberg particularly took pains to note that Silicon Valley, which includes San Jose as its centerpiece, is faring much better than Southern California, mainly because the brunt of defense cutbacks are being absorbed in the area surrounding Los Angeles.
As proof, Forsberg noted that unemployment rates have remained lower in the San Jose metropolitan area than in the state overall, as well as lower than the national average.
Credit analysts also focused on the fact that International Business Machines Corp. -- which is in the midst of a major corporate restructuring -- accounts for the largest share of assessed value in the San Jose merged project areas at 19.25%.
Such concentration can pose a problem for a redevelopment agency if a major company decides to pull out from one region, thereby eroding property values.
IBM, however, has signaled a continuing strong commitment to the San Jose area, where it has one of its largest and most profitable divisions, according to Forsberg. The company's total share of assessed value also has declined steadily as overall values in the project areas increased -- IBM's share as a percentage of total value is about half what it was a decade ago.
Appeals by property owners over their assessed valuations also have jumped in the last couple years because of the recession, a development that can lower the financial cushion for bonds.
Although successful appeals can lower taxes, "we are comfortable that the level of existing assessment appeals will not adversely affect bondholder security" in San Jose, said Ron Junker, an analyst at Moody's Investors Service, which rates the San Jose bonds A.
Junker said Moody's ran tests on potential assessment reductions that were twice as conservative as the redevelopment agency's. Even under the scenario, successful appeals "will not cut into [debt service] coverage levels any great deal," he said.
Today's deal is expected to include both uninsured and insured portions.
Forsberg said investors also naturally wonder about "the political situation in California," given that the state in the last couple years has diverted local property tax revenues to help balance its own budget.
Although another diversion is possible next year, Forsberg said he believes the new law "succeeded in blunting the attacks on redevelopment agencies." Accordingly, "we do not see a perpetual impact on redevelopment projects," he said.
The San Jose agency also recently prevailed in a lawsuit initiated by San Jose County and three other local taxing entities. The suit contended that the agency is not authorized to issue 30-year bonds because such an issuance would improperly extend the redevelopment plans without an amendment.
A state appellate court recently upheld a lower court decision in favor of the redevelopment agency, and the decision is now final.