Targeted marketing results in successful sale during volatile market

Transaction Summary
On November 5, 2018, SCS served as Book Running Senior manager for these bonds, which were issued on a tax-exempt basis to currently refund the Authority’s outstanding State Contract Bonds, 2003 Series A, 2005 Series A, 2007 Series A, and 2008 Series B, and to pay certain costs of issuance related to the Bonds. The refunded bonds are expected to be redeemed on December 20, 2018. 

They are rated Baa2, BBB+, and A- by Moody’s, S&P, and Fitch, respectively. The Bonds were issued as serial bonds maturing on September 1st of 2019 through 2025 and are special obligations of the Authority payable from and secured by, primarily but not exclusively, amounts appropriated and paid to the Authority or its Trustee pursuant to the New Jersey Sports and Exposition Authority Law.

Summary of Marketing Efforts
SCS aggressively pre-marketed the Transaction to a targeted but diverse base of investors. SCS’ marketing plan encompassed all investors currently or recently active in the short-end of the curve for both New Jersey and National paper. SCS also focused its pre-marketing efforts on buyers of the shorter maturities in the recent TTFA Transaction and EDA State Office Building Transaction as a tailored investor target pool. In addition to this “target” pool, SCS expanded its focus and attempted to identify buyers who did not participate in the TTFA Transaction or the EDA Transaction (or participated in a different maturity range). These investors, who did not appear to participate on the short end of either of these transactions but that SCS’ monitoring of the market indicated remained viable peripheral targets, then comprised our “secondary” pool. SCS utilized these pools as the basis for our investor education and pre-marketing efforts as well as our gathering of reads and other market intelligence.

Market Context
Overall Demand Drivers The SMA investor sector has been responsible for driving spreads in the short end of the curve to tremendously tight spreads and we actively marketed the transaction to this investor group. However, SMA interest in this transaction was extremely limited due to the transaction’s current rating levels, as well as capacity issues at those SMAs who will consider the State’s appropriation credit. Despite the lack of broad interest from SMA accounts, Siebert was still able to bring certain key SMA accounts as well as a broad and wide group of mutual funds, money managers, and insurance companies into the transaction.

General Market Conditions
The transaction priced during an extended period of volatility in almost all markets. Both the US Municipal and Treasury markets had been focused on a deepening trade war with China and other countries, on FOMC action, and the then-upcoming Federal elections. The week prior to pricing, the 1-, 5-, and 10-year MMD yield moved weaker by 7, 6, and 9 bps respectively, and bond sales that lacked SMA sponsorship were seen to struggle heavily: spreads on the AMT portion of the previous week’s LAX pricing (no SMA interest in AMT) required cuts of up to 30 bps on the shorter maturities—with an average cut of 19.9 bps through 15 years.

Specific Market Conditions
Several concurrent factors added further difficulty to the execution. A recent strong supply of NJ appropriation bonds was still being absorbed by the market; the scheduled NJ EDA appropriation sale scheduled for the following week offered supply alternatives for interested investors; additionally, all three of these transactions received a higher Baa1 rating level from Moody’s.

Pricing Strategy
SCS very carefully crafted our pricing strategy to account for challenging market conditions from the prior week, recent NJ appropriation supply and the need to ensure a clear market for pending additional NJ appropriation supply, lack of SMA participation and the impact of the rating differential from the State’s other similar transactions. We recommended spreads to MMD that we felt offered a slight pricing concession in certain key maturities to the recent higher-rated appropriation transactions, with a slight additional concession for the 2024 maturity given its large size and the fact that it was an “off-the-run” maturity (mutual fund investors participate most actively at the 5, 7, and 10-year benchmark maturities). We felt that these spreads were at the right levels to attract investor interest and generate pricing momentum without signaling too much of a concession.

Investor Reception and Results
SCS’ investor strategy was very effective overall and the Transaction was met with substantial institutional investor interest. By the end of the preliminary order period, SCS had secured over $264 million orders from 18 different investors across six different investor classes In addition, the syndicate secured orders from 2 retail clients totaling $1 million. In aggregate, at the end of the preliminary pricing period, the transaction had a subscription level of 2.67x. By the end of repricing, total orders (net of a single drop) had grown to over $274.9 million, with an aggregate subscription level of 2.77x.

Through both investor education and general marketing, SCS was able to drive 5 different SMAs into 5 different maturities. Given the hesitation of SMAs, SCS also focused substantial efforts into other investor classes, with efforts including phone calls between bankers and investor analysts as well as targeted conversations with SCS’ sales team. These efforts were able to drive a number of Bond Funds, Money Managers, and Money Market Funds to the table with sizable orders. Based on the size and quality of these orders, and the resulting substantial oversubscription levels on the first three maturities, SCS was able to decrease yields by 8, 6, and 2 bps in the first, second, and third maturities, respectively. Taken on an aggregate par-weighted basis, yields were lowered 0.1 bps in the entire transaction. Further, yield changes in these maturities resulted in a $2.6 million increase of premium (assuming final par amounts) and substantially mitigated the effects of the necessary cuts effected in the out years.

Conclusion
The transaction priced at a TIC of 3.358% and generated over $4 million of cash flow savings in just the first two fiscal years (ending 6/30), with the majority focused in Fiscal Year 2020. Aggregate transaction savings for the State totaled over $4.07 million and net present savings totaled $3.68 million, or 3.513% of refunded par. Given the significant savings generated by the transaction, that there have been no secondary market trades from our transaction of the Bonds, and that there were no remaining balances from the transaction, we do believe that we achieved the lowest possible spreads necessary to place the bonds with permanent investors.