San Francisco Airport Sells $355 Million in Refinancing Wave: Muni Credit
San Francisco International Airport, the ninth busiest in the U.S., sold $354.6 million of tax-exempt and taxable refunding debt yesterday as issuers take advantage of lower rates to grab savings.
Refinancing deals this year total about $25 billion, according to data compiled by Bloomberg. That amount doesn’t include refundings in combination with new issues. Borrowers are looking to lower debt-service costs by locking in cheaper rates, Chris Mier, a managing director at Loop Capital Markets LLC in Chicago, said in a telephone interview.
Yields on top-rated 10-year tax-exempt debt hovered at 2.2 percent today, compared with the low for this year of 2.17 percent on Aug. 23. Yields on top-rated 30-year tax-exempt bonds today were 3.85 percent, from a year-low the day before of 3.82 percent.
“During this last rally in the muni market with rates coming down as much as they have, there’s no question that there’s much more refunding activity that’s happening or about to happen,” Mier said. “The timing is excellent for municipal issuers to go to the market and refinance older debt that’s on the books at higher interest costs.”
San Francisco airport’s refinancing included $106 million of A+ tax-exempt debt, with the largest portion, $36.9 million, maturing in May 2025 and yielding 4.03 percent, according to data compiled by Bloomberg. That’s 19 basis points below an index of 14-year tax-exempt A+ rated transportation debt. The final maturity is in 2030, with $1.3 million of debt yielding 4.49 percent, or 17 basis points below an index of 19-year tax- exempt A+ rated transportation bond. A basis point is 0.01 percentage point.
Boost to Issuance
Municipal issuers are set to sell $145 billion of total debt from the beginning of the year through Aug. 26, according to data compiled by Bloomberg. That’s $107 billion below debt sold in the first eight months of last year. If rates stay low, refundings will help boost issuance in 2011, Richard Ciccarone, a managing director at McDonnell Investment Management LLC in Oak Brook, Illinois, said in a telephone interview.
States and municipalities may end up issuing $30 billion of refunding debt from now through year-end, predicted Loop’s Mier.
“Interest rates are pretty darn low,” Ciccarone said. “We’re expecting if refundings kick in, it would make a real difference in the market in terms of supply.”
San Francisco airport officials reduced the portion of refinancing that includes tax-exempt bonds and securities subject to the alternative minimum tax by $132 million to $230 million, because of the jump in yields yesterday, Chloe Weil, the airport’s debt manager said in a telephone interview from San Francisco.
Yesterday’s sale by the San Francisco City and County Airport Commission follows a $350 million refinancing at the end of June that refunded taxable, tax-exempt and AMT bonds. Maturities and rates for those securities offered easier-to-find savings than yesterday’s refunding, Cindy Nichol, the airport’s finance director, said in an interview. “Now we’re looking at the high-hanging fruit rather than the low-hanging fruit, which is very sensitive to what the interest rates are,” Nichol said.
The transaction helped convert $51 million of variable-rate debt with a Dexia SA (DEXB) letter-of-credit into fixed-rate. The airport will pay $4.6 million to end a swap attached to the bonds with a notional value of $30 million, Nichol said.
“Our original plan was to replace Dexia with a healthier commercial bank and because interest rates have fallen so dramatically in the last month, we decided to fix the bond out instead,” Weil said.
The ratio between Treasury yields and municipal yields fell yesterday to 95.86 percent after tax-exempts represented more than 100 percent of Treasuries for most of this month. The average ratio for 2011 is 91.77 percent. Municipals and Treasuries became more expensive as investors sold equities after Standard & Poor’s downgraded the U.S. to AA+ and reports of a slower economic recovery.
Since Treasury yields have decreased, shorter tax-exempt maturities may offer issuers the most savings on advanced refunding deals where the bond proceeds must sit in an escrow account until the older bonds become callable, Mier said.
“They’re going to have negative arbitrage, but the savings overwhelm the negative arbitrage,” Mier said, referring to when escrow earnings fail to match debt-service costs. “And since the escrow is in effect for a shorter period of time, it’s less costly in terms of being a subtraction from the net present savings.”
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