City of San Antonio, TX
$27,895,000 General Improvement Refunding Bonds, Series 2020
$443,695,000 General Improvement Refunding Bonds, Taxable Series 2020
June 30, 2020
This transaction represented SWS’ 11th senior managed mandate for the City and its first exceeding $450 million
As interest rates hit all-time lows in early March, the City awarded SWS with this refinancing transaction as a result of SWS’ continual coverage and ongoing updates of its refunding opportunities. Originally scheduled to price on April 20th, the transaction was delayed twice due to the effective market shutdown that began on March 9th and the unprecedented lockdowns across the country due to the COVID-19 pandemic.
The Tax-Exempt Series was issued to current refunding outstanding bonds while the Taxable Series was issued to current refund and advance refund outstanding bonds for debt service savings. The bonds held underlying ratings of Aaa/AAA/AA+ and stable outlooks. The Tax-Exempt Series was structured serially from 2021 through 2023 and the Taxable Series was structured serially from 2021 through 2034 with a 10-year par call. Both series were structured to generate level debt service savings.
Unprecedented redemptions among mutual funds and institutional investors looking to raise liquidity (cash) during the month of March led to a freeze of new issues. In this environment, the City, along with its enterprise funds, were busy analyzing the potential impacts on the local economy and developing financial solutions to maintain solid fiscal stability. By early April, as the municipal bond market began to thaw with highly rated essential credits, the City tentatively set a new pricing date in mid-May. As mid-May approached more transactions were beginning to price, yet benchmark interest rates and pricing spreads were well above pre-March 9th levels. Additionally, the City kept its focus on developing innovative fiscal solutions and making the hard but necessary budget cuts to generate a consecutive fiscal year of General Fund budget surplus of $15 million. Historically, the City has been very proactive in the management of its expenditures and this time was no exception, especially during a pandemic prompting rating agencies to continually request updates from the City.
After a lengthy period of updating its five-year financial projections and providing City Council with a novel trial budget for the next fiscal year, the City was ready to enter the market to sell its refunding bonds. The timing could not have been better as benchmark interest approached new historical lows in the short-end of the yield curve and pricing spreads for Texas local governmental credits at historical lows due to the general financial strength of Texas credits. Prior to the City’s bond sale, the typical conservative pricing strategy would be to first develop the largest book of orders early by attracting investors with pricing spreads much higher (wider) than projected. This is often a very sound strategy to implement in order to solicit the initial interest of investors.
Oftentimes, these transactions would be repriced with pricing spreads lowered by as much as 10 basis points or more. However, for the City’s transaction, SWS’ Head Underwriter felt that there was just the right amount of investor demand and market momentum to start off much more aggressively and see if pricing spreads may be reduced even further. Municipal bond fund inflows were positive for seven consecutive weeks, Texas credit spreads were historically low, and the benchmark AAA MMD and Treasury yields were either unchanged or lowered approximately 1 to 2 basis points per day from the week prior.
Initially the preliminary par amount of both Refunding Bonds totaled $264 million, but as pricing week approached, lower interest rates provided the City with an opportunity to upsize the refunding transaction to approximately $472 million, an increase of $208 million.
The week of June 29th would be a holiday shortened week with an early market close on Thursday and the entire day Friday in observance of Independence Day. As such, many deals scheduled to price that week would fall on the same day as the City’s transaction. Notably, a $1.1 billion
Massachusetts School Building Authority (Aa2/AA+/AAA) transaction was scheduled to price the same day. SWS began the Indications of Interest on the Taxable Series approximately 2 to 15 basis points lower than the underwriting syndicate’s average price views for the first nine maturities (2021 through 2029). At the end of the Indications of Interest period, those maturities were between 1.22x to 5.34x oversubscribed, for an average of 3.30x. Every maturity was oversubscribed for except for the 2033 maturity which was 70% subscribed for. In total, there were $1.15 billion in priority orders from over 50 investors.
With positive momentum going into the day of pricing and the price guidance period, SWS looked to tighten the pricing spreads of the Taxable Series another 2 to 8 basis points on certain maturities based on the oversubscriptions. For the Tax-Exempt Series, the order period was opened for an hour and a half and garnered orders from 9 different investors bringing the total investor count to 57 (two investors had also placed orders in the Taxable series). Each maturity of the Tax-Exempt Series was 1.10x to 2.85x oversubscribed for. At the end of the Taxable Series’ price guidance period, the aggressive reduction in pricing spreads for those select maturities caused $292 million in priority orders to drop. Despite these drops, the order book still maintained a healthy 1.14x to 3.96x oversubscription for all maturities. This included the shortfall in 2033, filled by an investor from an adjacent, oversubscribed maturity. For the Tax-Exempt Series, pricing spreads were lowered by 2 basis points in the 2022 maturity and 1 basis point in the 2023 maturity.
When it was time to set the coupons for the Taxable Series, SWS was able to leverage the enhanced capabilities of the firm’s corporate and taxable desks, namely the ability to hedge taxable municipal securities for the benefit of investors. Buyers of municipal bonds may choose to eliminate interest rate risk by hedging their purchase (that is the new muni position) and SWS makes this as seamless as possible for investor clients.
As a result of the reduction in pricing spreads, the Refunding Bonds generated present value savings of $51.79 million or 12.09% of the refunded par amount. On an average annual basis, the Refunding Bonds produced gross debt service savings of $3.90 million from FY2020 through FY2034. These refunding savings were also improved through bidding of the open market escrow securities where the refunding escrow saved $820,535. The aggressive pricing approach and smooth execution of this multifaceted transaction was appreciated by the City as it continues to develop fiscal solutions to the ongoing COVID pandemic.