Yonkers, New York, officials hope recent population growth coupled with the city’s longstanding debt service security measures will spark market enthusiasm for its upcoming general obligation deal.
New York State’s fifth largest city will sell $152.2 million of GO serial bonds Wednesday in a negotiated offering led by senior manager FHN Financial. The deal is broken into three tranches: $75.9 million of 2019A tax-exempt GO serial bonds, $54 million of 2019B tax-exempt school serial bonds and $22.3 million of 2019C federally taxable serial bonds.
Yonkers, about 11 miles north of Manhattan in Westchester County, will use proceeds from the transaction to finance capital projects throughout the city and its school district coupled with redeeming outstanding bond anticipation notes. The city has seen a boom of new residents the last few years attracted to transit-oriented development housing options providing 30-minute commutes to Grand Central Station.
M&T Securities and Loop Capital Markets are co-managers on the deal with Capital Markets Advisors the municipal advisor. Hawkins Delafield & Wood LLP is bond counsel.
All bonds from the sale contain protections under the 1976 Special Local Finance and Budget Act enacted by the state legislature for Yonkers when the city was in the midst of a fiscal crisis. The lockbox legislation requires that the city use a percentage of revenues from property and sales taxes to set aside payments for debt service to bondholders with the state comptroller designated as a fiscal agent. For 2019, Yonkers has set aside 19% of property tax revenue for debt service and 1% of sales tax collections.
“Because of the fiscal agent act we are held to a much higher standard,” said Yonkers Mayor Mike Spano. “You should feel pretty safe as a bondholder with Yonkers dollars.”
State oversight from the 1976 special act also requires Yonkers to adopt a balanced budget that is certified by the state comptroller. The city must also prepare four year financial plans that anticipate out-year shortfalls and identify gap-closing measures.
“It forces us to be much more conservative with our budgeting and provides much more protections for bondholders,” said John Liszewski, commissioner for the Yonkers Department of Finance. “It has a major impact on how the city operates.”
Moody’s Investors Service and S&P Global Ratings rate the transaction A2 and A, respectively. Both assign negative outlooks.
Build America Mutual, rated AA by S&P, is insuring the bonds.
Michael Solomon, senior vice president of FHN, said he has sought to educate rating agencies about the security features offered by the fiscal agent act in hopes they will include in their credit analysis. S&P made brief mention of the intercept provisions in its rating action on the Yonkers bonds while Moody’s issued no statement about the act in its report Wednesday.
S&P credit analyst Nora Wittstruck said that that Yonkers’ debt service protections are not given the same weight as the city’s budgetary conditions when evaluating its credit strength. She said oversight of Yonkers is not as strong as that for Nassau County, which needs approval from a state fiscal monitoring board before adopting all budgets or issuing bonds.
“When we are accessing the city’s credit quality our analysis focuses on the credit fundamentals of Yonkers and not bondholder recoveries,” Wittstruck said. “For bondholders it is a unique structure that not many local governments utilize.”
A May 2016 S&P report noted that legal provisions in bond documents could complement it when analyzing municipal credit conditions. The analysis also stressed, however, that an issuer’s economic, financial and management performances remain the primary driver when deciding ratings.
Moody’s analyst Robert Weber wrote that Yonkers’ A2 rating is driven largely by a large tax base that has seen a recent resurgence with the construction of a large number of new apartment/condo complexes around the city’s mass transit centers. Weber said the high-density complexes that are projected to add around 5,000 new residents have helped Yonkers maintain an A2 rating despite narrow reserve levels that prompted Moody’s to
“They are starting to see a lot of sales tax and income taxes coming into the city from people filling these residential complexes that were built on largely vacant land,” Weber said. “One of the drivers for keeping them at this current rating level is the expectation that these developments will bring new revenues.”
Wittstruck wrote in a report Wednesday that following a brief period of stabilized financial operations, Yonkers began to experience budgetary challenges during the 2017 fiscal year when education and city expenditures outpaced revenue. Yonkers had a combined operating deficit of nearly of $43 million in 2018 when including around $10 million of deferred pension costs, according to S&P. Unaudited 2019 results show improved operations with a combined surplus between the city and school board of $12.2 million that equates to 1% of combined expenditures.
Spano said despite the challenges funding its school district amid declines in state aid, Yonkers is on the upswing with the city’s population rising to around 202,000 from 198,654 in a U.S. Census Bureau estimate from 2014 before many of the new apartments were built.
He added that redevelopment of the 100-acre site on which Empire Casino and Raceway is located and which MGM Resorts recently purchased also provides potential for economic growth, especially if a proposed gambling license is secured there. Yonkers is getting an additional business from motion picture company Lionsgate building a production studio downtown that will include five sound stages.
“There has been substantial growth for a city of our size,” Spano said. “It’s adding to our economic-sensitive tax base.”
Final maturity for the $75.9 million of 2019A bonds is slated for 2037. The $54 million of 2019B bonds, which are due in 2039, are supported by the New York State’s school debt intercept program and have an enhanced Moody’s rating of Aa3.
FHN, which is a fixed income platform under First Horizon National Corporation, is leading the Nov. 6 bond sale in its first deal for Yonkers. The firm was previously called FTN Financial before changing its name to FHN on Oct. 25 in connection with an overall branding by First Horizon National Corporation.
