D.C. issuing $1.6 billion of GO bonds, refunding BABs

The District of Columbia is kicking off this fall's deal closing season with a negotiated $1.6 billion issuance of tax-exempt general obligation bonds expected to generate a lot of demand and also includes a tranche refunding outstanding Build America Bonds.

"I would view this as a potential core holding for almost any municipal portfolio," said Patrick Luby, senior municipal strategist, CreditSights.  "You have the full faith and credit GO of the seat of the nation's government, it's kind of a unique credit." 

Luby concedes the offering will need to compete with some other juicy issuances coming to market so the pricing bears watching. 

CreditSights

The bonds are expected to be priced on Tuesday Sept. 10 with a closing date on Oct. 10, 2024. The syndicate for the issuance is led by Siebert Williams Shank & Co., LLC with Jefferies serving as the co-senior manager. Orrick, Herrington & Sutcliffe LLP is the bond counsel. 

The major chunk of the issuance includes $690.745 million of Series 2024A bonds, with the proceeds going to funding or reimbursing the District for various capital project expenditures under the city's capital improvements plan.

Series 2024B are GO refunding bonds totaling $319.155 million that will be used to fund tender offer bonds for certain maturities of the District's series 2015A and 2016ADE GO bonds. 

The proceeds of Series 2024C, totaling $590.310 million will refund outstanding maturities of the District's income tax-secured revenue bonds issued as Build America Bonds series 2009E & 2010F. 

Issuing GOs and using the proceeds to refund BABs has become a popular tactic and was used by Baltimore County earlier this month as part of a $180 million issuance. According to data from J.P. Morgan, about 40 issuers have either called or announced re-financing plans for $19.2 billion worth of BABs this year. 

"Because of the vintage of the BABs, they got fat with higher than the current market coupons on them," said Luby. "If there is an opportunity to sell tax exempts at a lower yield and to refinance and pay off those the high coupon BABs, then I think D.C., like a lot of other issuers, is taking a serious look at that."  

The District's roadshow for the deal reveals the assessed value of taxable property growing 15.9% since fiscal year 2019 and measured as $255 billion in 2023. Real property tax collections have grown by $141 million from 2019 to 2023 reaching a high of $2,868 million in 2021. Total tax revenues for the same period are up 18%. 

Luby is not expecting a great deal of interest from international buyers due to an "enormous chunk of supply coming into the market." Depending on the pricing, the deal could attract investment from domestic, investment-grade, corporate buyers.

The issuance has been rated by all three major credit rating agencies with Moody's granting an Aaa but with a negative outlook. 

According to their analysis, "The negative outlook reflects the District's economic, financial, capital market and governance linkages to the federal government. If the U.S. government rating were downgraded, DC's ratings would also likely move because of the District's sensitivity to federal spending cuts, dependence on federal transfers and exposure to capital markets disruption." 

Chatter from the U.S. House of Representatives has turned towards the possibility of a government shutdown when current spending levels expire on Sept. 30. House Republicans are looking to marry spending to a bill that would require proof of citizenship before registering to vote, a tactic which could increase the odds of a shutdown.

S&P Global Ratings has the issuance pegged at AA+. According to S&P, "The District's GO bonds are secured by its full-faith-and-credit pledge, including a real property tax that DC levies annually, without limitation as to rate or amount, in amounts sufficient to pay debt service on all of its GO debt outstanding." 

S&P also notes the possibility of Congress stepping into any kind of budget calamity in the District.  In the mid-1990's a Financial Control Board established by Congress took control of the city's finances until 2001 as the budget was rebalanced.      

Per S&P, "Somewhat offsetting these factors is DC's lack of complete budget autonomy because both the District's federally funded, and locally funded budgets are subject to Congressional review." 

"As an offsetting factor, reflecting DC's growth, commitment to funding public transit and education, and its unique government operations, effectively acting as a city, a state, and a school district."  

Fitch rates the issuance at AA-plus stable and notes the possibility of Congressional oversight. Per Fitch, "Fitch recognizes that the federal Home Rule Act requires explicit congressional approval of the District budget as part of federal appropriations bills before local budget bills become effective."  

In June the District of Columbia passed a contentious budget that eliminated the tax exemption on interest from out of state bonds. According to the D.C. Office of the Chief Financial Officer, the move will save the District $7.7 million in fiscal year 2025 and about $16 million annually thereafter. 

Luby sees the current issuance as a possible remedy to those holding out of state bonds. "I think it's a warning shot across the bow," he says.  "If you're a muni investor in D.C., even though you might prefer to diversify your portfolio, you need to be thinking about D.C. GOs.  So, I think there will be more than usual retail demand for this deal."