The District of Columbia is set to issue $1.43 billion of income tax-secured revenue bonds in a mixture of exempt, taxable and forward-delivery structures, coming into a market that recently has been favoring high-grade paper.
BofA Securities as senior manager and Siebert Williams Shank as co-senior manager will price the $1.453 billion of tax-exempt and taxable bonds.
The deal began pricing Tuesday. The $651.575 million of tax-exempt Series 2022A bonds saw the 10-year with a 5% coupon yield 2.77%, the 20-year with a 5% coupon yield 3.35% and the 25-year with a 5% coupon at 3.48%.
The $638.450 million of Series 2022C tax-exempt forward-delivery refunding bonds saw bonds in 10-years with a 5% coupon yield 2.88% and the 15-year with a 5% coupon yield 3.21%. The forward delivery date is 9/7/2022.
The taxable tranche, $139.305 million, saw spreads of +60 to +90 U.S. Treasuries on maturities from 2026 to 2031.
Co-managers on the deal are Academy Securities, Morgan Stanley, Citigroup, Ramirez & Co. and Loop Capital Markets.
The financial advisors are PFM Financial Advisors and Phoenix Capital Partners. The bond counsel is Orrick, Herrington & Sutcliffe and the disclosure counsel is Hawkins Delafield & Wood.
The bonds are rated Aa1 by Moody’s Investors Service, AAA by S&P Global Ratings and AA-plus by Fitch Ratings. All three have stable outlooks on the credit.
The way the transaction is structured gives the district a lot of flexibility, John Hallacy, founder of John Hallacy LLC, told The Bond Buyer.
“The income tax secured revenue bond structure has performed well over the years through many issuances,” Hallacy said. “The proposed refunding forward delivery bond is one of the largest that we have seen in the market. This structure affords the issuer a great amount of flexibility and should be well received by buyers on the short end.”
Proceeds from the Series 2022A and 2022B bonds will be used for capital projects under the district’s
The district's fiscal 2022-2027 CIP included 35 new projects along with 233 ongoing projects carried forward from the previous CIP. The total six-year proposed project spending is $8.8 billion.
The CIP also includes information on the district’s water distribution system and sanitary and combined sewage systems operated by the District of Columbia Water and Sewer Authority. DC Water’s board approved and adopted its fiscal 2021-2030 CIP with a 10-year disbursement of $5.43 billion and the related lifetime budget of $12.13 billion.
Some of the district’s capital projects are separately funded through the Highway Trust Fund. The total proposed fiscal 2022-2027 HTF is $1.35 billion.
The issuer expects the Series 2022C refunding bonds will be available for delivery around Sept. 7.
The District of Columbia is not a state and its government performs the functions of a state, county, city and school district.
While small in size and population, it is a wealthy area due to the various government workers, lobbyists and other notables who live there. If it were a state, it would rank 47th in population size, however its per-capita income leads all 50 states and it has a GDP greater than 17 states.
Moody’s said its rating “reflects the broad-based pledge of all of the District of Columbia's personal income tax and business income tax revenue that results in high coverage of maximum annual debt service. The rating also reflects strong bondholder protections that include set-asides of funds for debt service that start four months before a payment date and a strong additional bonds test.”
Moody’s said the district's high wealth can benefit bondholders during periods of economic growth, but noted this also makes the income tax especially sensitive to economic and market fluctuations. The bonds are secured by a pledge of the district's personal income and business income taxes.
Under the Home Rule Act enacted by Congress, the district can create a security interest in the pledged revenues for the benefit of bondholders, to insulate them from general obligation bondholders, and to protect them from future impairment.
Pledged revenues are deposited by a third-party collection agent with the bond trustee, which holds the money outside the district's general fund. Only after debt service set-aside requirements are met are the pledged revenues released to the district for operations.
Moody’s maintains Aa1 ratings on about $4.9 billion of D.C.’s outstanding income tax-secured revenue bonds.
The district was last in the market on April 13, when it issued $159.695 million of green bonds consisting of Series 2022A tax-exempt private activity revenue bonds subject to the alternative minimum tax and Series 2022B taxable revenue bonds for the DC Smart Street Lighting project.
On April 13, the yield on 10-year 5% GO was calculated at 2.46% and the 30-year was at 2.81%, according to the Refinitiv Municipal Market Data AAA scale. On Monday, the 10-year AAA was at 2.49% and the 30-year was at 3.01%.
Since 2011, the district has sold a total of more than $15 billion of debt, with the most issuance occurring in 2019 when it sold $3.1 billion of bonds.
Fitch said its rating “reflects strong legal provisions, strength and resiliency of the structure and the district's unique position under federal law. Pledged revenue growth remains strong and a two-tiered additional bonds test offsets the risk of over-leveraging the somewhat more volatile non-withholding portion of the income tax.”
Growth in pledged revenues over the longer term is expected to be strong and ahead of national economic growth, according to Fitch.
“Historical trends remain robust, reflecting resilience and strength of the local economy through recessions and federal contraction. Fitch links the performance and outlook for income tax and business franchise tax revenues to the district's population growth and overall economy,” Fitch said.
The district forecasts modest annual tax revenue growth in fiscal 2022 through fiscal 2026.
“Fitch considers the revenue estimates prudent and achievable, assuming no external economic interruptions,” the agency said. “Given the District's historical practice of conservative revenue and expenditure budgeting, Fitch anticipates actual revenue performance could exceed the forecast, leading to a return to operating surpluses.”
