New York City TFA's $2.1 billion deal includes BAB refunding provision

The New York City Transitional Finance Authority may refund some of its Build America Bonds with a $2.11 billion deal on Tuesday.

The agency would join the wave of issuers refunding their BABs in its third and largest deal so far this year. 

"This is a pretty plain, vanilla refunding" apart from the BABs, according to New York City Assistant Comptroller for Public Finance Timothy Martin.

"The transaction overall just is a continuation of our long-standing debt management policies. We can opportunistically deliver a substantial amount of savings to the city," Martin said. "It gives investors an opportunity to invest in our bonds, which are highly rated. And we look forward to investors participating in the transactions as they have."

The $2.11 billion Future Tax Secured Subordinate Bonds, Fiscal 2025 contains two tranches: $1.92 billion of Series A bonds, with $1.79 billion of tax-exempt Subseries A-1 and $125.87 million of taxable Subseries A-2; and $194.67 million of Series B bonds, with $119.15 million of Subseries B-1 tax-exempt bonds and $75.53 million of Subseries B-2 taxable bonds. 

The deal will be negotiated, with Ramirez & Co. as senior manager, Jefferies and Wells Fargo as co-lead managers, and 23 co-managers. The Public Resources Advisory Group and Frasca & Associates are serving as financial advisors and Norton Rose Fulbright is bond counsel. 

The retail order period is scheduled Tuesday with institutional pricing on Wednesday. The tax-exempt bonds maturing after November 1, 2034, are callable on or after that date; all other bonds are subject to a make-whole optional redemption at any time. 

Moody's Ratings on Thursday affirmed its Aa1 rating and stable outlook on the TFA's future tax secured bonds.

The rating reflects strong debt service coverage provided by the pledge of City of New York personal income tax and sales tax revenue and "a strong legal structure that insulates TFA from potential city fiscal stress," Moody's said.

Fitch Ratings and S&P Global Ratings most recently affirmed AAA ratings in May.

The bonds are secured by New York City's personal income tax revenues.

If the PIT revenues don't reach at least 150% of the maximum annual debt service on the TFA's outstanding bonds, the city comptroller will direct sales and use tax revenues to the payment of debt service, but this has never been necessary. The TFA does not rely on the city or state to appropriate these revenues.

Fiscal year 2023 tax revenues totaled $26.7 billion, which is a 6% increase year over year, according to Fitch's rating report in May. The PIT revenues were up 3%, and the SUT revenues were up 11%. 

"Pro-forma all-in debt service coverage is a very strong 4.7x based on fiscal 2023 pledged revenues compared to projected fiscal 2028 debt service, which assumes the issuances of $26.3 billion in new debt through fiscal 2028 for general city capital purposes after giving effect to the issuance of the series G bonds," the report said. "The city projects pledged revenues to decline by 2.6% during fiscal 2024 before resuming growth through fiscal 2028."

The TFA has five BAB issuances from 2009-2010 that may be refunded through this deal, according to a notice posted July 9 on the Municipal Securities Rulemaking Board's EMMA bond disclosure website Those issuances have roughly $2.19 billion of bonds outstanding. 

Build America Bonds, created in 2009 as part of the Obama administration's economic stimulus provisions, allowed issuers to sell debt they would normally sell as tax-exempt as taxable bonds, and collect a subsidy from the federal government.

The program expired at the end of 2010. And the federal government soon after began reducing the promised subsidies under the budget sequestration process.

Issuers have deemed the drop in subsidies an extraordinary event that allows them to call the bonds, although the refundings have been controversial with bondholders.

The TFA and its deal team has not yet decided which, if any, of the BABs it will refund, according to Jay Olson, New York City deputy comptroller for public finance; the July 9 filing said "if any Build America Bonds are redeemed pursuant to the extraordinary optional redemption provision, such redemption is expected to occur on or about August 29, 2024."

The TFA announced in a July 1 filing that it will redeem $23.42 million of BABs from a Fiscal 2010 Series C-2 issuance on Aug. 1  

Interest rates were very high when the TFA's bonds were issued in 2009 and 2010, so refunding them now can create significant savings, noted John Hallacy, founder of John Hallacy Consulting LLC. Only three of the outstanding BAB CUSIPs that the TFA may refund have coupons below 5%, and $125 million of the TFA's 2009 BABs have a coupon of 6.267%. 

The market has seen a wave of refundings for Build America Bonds over the past year.

In 2024, J.P. Morgan analysts identified 33 issuers looking to refund or redeem their BABs, which could result in $17.6 billion total BAB ERP activity for the year. 

As of July 11, 19 of the issuers identified by J.P. Morgan have called their BABs, affecting $9.6 billion of debt; six have posted conditional calls, which could impact $1.5 billion of debt; and nine issuers, with a potential $6.6 billion of debt, have announced that they are considering calling their BABs. 

The Massachusetts Bay Transportation Authority joined the ranks of issuers refunding their BABs with its $1 billion deal at the beginning of July. The deal refunded $377 million of the MBTA's BABs. 

The Los Angeles United School District made the largest BAB call so far this year in April, calling $2.6 billion bonds, according to J.P. Morgan. The Oregon Department of Transportation was the most recent issuer to join the list when it called $493 million of its BABs on July 10.

The New York Metropolitan Transportation Authority has an $800 million refunding issuance later this month, which could include up to $779 million of its $3.7 billion of BABs. 

Amid pushback from some exiting bondholders, at least one issuer backed off from plans to refund its BABs.

"We conferred very thoughtfully with OMB, the law department and counsel" before undertaking the refunding, Olson said. "I've worked for the city since 1998, continuously in public finance, and we're always mindful that anything we do is subject to scrutiny and questioning. So we are moving forward very thoughtfully, very deliberately, and we're confident."

Olson said the comptroller's office had not heard any pushback from bondholders about calling BABs. 

"The EMMA notice went out at the beginning of the week. So here we are on Friday, and I'm not aware of any comment," Olson said. "But that said, something may come up, and we cross that bridge when and if we get there."

The TFA issued $1.25 billion of bonds in February and $1.8 billion in May, which were well-received by the market. Both deals were future tax secured subordinating bonds, and both had tax-exempt and taxable tranches. Those deals were also new money; this is the agency's first refunding issuance of the year. 

"There have been a lot of multi-billion dollar deals this year," Hallacy said. "So far, we haven't seen any size penalty imposed on really big deals, so I expect that this transaction will go pretty smoothly."

The TFA plans to issue roughly $6 billion of new money FTS bonds in fiscal year 2025, $5.8 billion in FY 2026, $6.4 billion in FY 2027 and $6.6 billion in FY 2028, along with refunding debt when market conditions are ideal. 

The TFA is a bankruptcy-remote financing vehicle created to provide strong protections for its bondholders from any fiscal stress experienced by the city or state governments, allowing it to sell debt rated one or two notches higher than the city's general obligation bonds.

Martin said the TFA's future issuing plans won't hold many surprises.

"You're going to see us bring in new money, because we need to bring in new money. And you're going to see us do refundings when the opportunity arises, because we like to save money when the opportunity arises," Martin said. "So the numbers are large, we're aware of that, but that's just the normal course of business for the city and for the TFA."

The TFA's bonds usually support New York City's 10-year capital plans; the city's 2024-2033 plan stands at $168.4 billion. The city passed its $112.4 billion 2025 budget at the end of last month.

The TFA has $49.95 billion of outstanding future tax secured bonds, according to the preliminary offering statement for its upcoming issuance, and roughly $7.9 billion of outstanding Building Aid Revenue Bonds.