Philadelphia Record Seen as Deal Talk Bars Public: Muni Credit
Philadelphia, which has the lowest credit grade among the five most-populous U.S. cities, is planning its largest general-obligation issue on record after holding an unprecedented closed-door conference to draw buyers.
Municipal officials last week convened their first gathering with investors, letter-of-credit providers and Wall Street analysts, Treasurer Nancy Winkler said at a briefing. The goal of the two-day event, which was off-limits to the public and press, was to showcase Philadelphia’s strengths even as it grapples with the highest debt burden of the nation’s five biggest cities and a jobless rate exceeding the U.S. average.
While Philadelphia debt is keeping pace with the biggest rally since November in the $3.7 trillion municipal market, the economic strains are still curbing the appetite of investors such as John Flahive at BNY Mellon Wealth Management in Boston.
“When you add up all these things, it’s still challenging and we will continue to be cautious,” said Flahive, who helps manage $22 billion in munis. “It’s not going to make us run out and load the boat.”
Philadelphia plans to sell $400 million of general- obligation securities in June, of which $218 million would fund capital projects, with the remainder going to retire higher-cost debt, said Winkler, 55. She was appointed in 2011 by Mayor Michael Nutter, a 55-year-old Democrat. It would be the largest fixed-rate, long-term issue for the city since at least 1990, when Bloomberg data begin.
The city, where about 26 percent of the population of 1.5 million lives in poverty, is rated BBB+ by Standard & Poor’s, three levels above speculative grade. S&P raised the credit one step a year ago, citing a budget surplus and elimination of a 2011 deficit.
In comparison, New York, the nation’s biggest metropolis, is graded AA by S&P, five levels higher. Los Angeles, Chicago and Houston are all ranked at least three steps above Philadelphia.
Still, Philadelphia debt has benefited from investors seeking higher-yielding assets as interest rates on city and state obligations remain below their 50-year average, said John Donaldson, who helps manage $750 million in munis at Radnor, Pennsylvania-based Haverford Trust Co.
Philadelphia has matched top-rated munis in gains this month. Buyers require about 2.4 percentage points of extra yield for city bonds callable in August 2016, little changed since local debt began rallying in mid-March, Bloomberg Valuation data show.
The June deal will benefit from “positive momentum” from the administration achieving surpluses, said Todd Sisson, who attended the conference and is a senior analyst at Wells Capital Management in Charlotte, North Carolina. The company oversees $34 billion in munis, including Philadelphia debt.
City officials told investors they expect to end 2013 with a $128.1 million surplus, after a $137.2 million deficit in 2009, according to a presentation from the conference.
“They’ve done a good job righting their ship,” Sisson said. “I walked away with a more favorable opinion of the city.”
Winkler said officials compiled a list of debt holders and prospective investors, with input from underwriters who paid for the conference. She declined to name the companies of the 147 attendees because she didn’t receive their permission to publicize the information, she said. She didn’t identify the companies that covered the $8,500 cost of the event because the city hasn’t received all the contributions, she said.
Bloomberg News wrote Nutter April 4 objecting to the press’s exclusion from the conference. The Associated Press, the Philadelphia Inquirer, and the Arlington, Virginia-based nonprofit Reporters Committee for Freedom of the Press supported the protest.
Conference participants asked about negotiations with labor unions, Winkler said. The city hasn’t reached new agreements with three of its four unions, and is appealing an arbitration award to its firefighters that would have imposed more than $200 million in new costs over five years, according to a presentation from the conference.
The metropolitan area’s 8.7 percent February jobless rate was a percentage point above the national figure. Philadelphia is also shouldering a debt burden of 11.6 percent of property values, the highest of the five largest cities, according to Moody’s Investors Service.
Philadelphia said in its slideshow to investors that efforts to bolster its pension system are part of its negotiations with city workers. The plan is 47.6 percent funded this year, bond documents say. That’s below the 80 percent threshold recommended, according to the Center for Retirement Research at Boston College.
Officials also fielded questions about the school system, Winkler said. Donaldson, who was invited but didn’t attend, called the school district Philadelphia’s “number one financial headwind.”
Facing a $304 million deficit for 2014, school officials have asked the city for $60 million and the state for $120 million. In March, they voted to shut 9 percent of public schools.
In the municipal market this week, issuers led Wisconsin are offering almost $8 billion of bonds as yields on benchmark 10-year munis are the lowest since January.
The 1.74 percent interest rate on AAA munis due in 2023 compares with 1.71 percent on similar-maturity Treasuries, data compiled by Bloomberg show.
The ratio of the two yields, a gauge of relative value, has been above 100 percent on all but one day since March 12, showing that local debt has cheapened relative to Treasuries. The figure was as low as 86 percent in January.
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