Council approves bond refinancing

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Finance > Markets disagree on county’s credit rating

By Arin McKenna

The Los Alamos County Council unanimously approved an ordinance authorizing the county to re-fund $40,085,000 in outstanding Gross Receipts Tax Improvement Bonds which mature on and after June 1, 2019 and are callable as of June 1, 2018 at a lower interest rate. The refinancing is expected to net $1,151,198 in savings for the county.
Re-funding the bonds is similar to the concept of refinancing a home at a lower interest rate. The interest rate on the original bonds was approximately 5.4 percent. Re-funding will reduce that rate to approximately 2.6 percent.
“I’m pleased to say that today we successfully marketed this re-funded bond issue,” Deputy County Administrator Steven Lynne said.
RBC Capital Markets is serving as the bond underwriter for the county, facilitating the agreement by buying the bonds and reselling them.
Vice President Erik Harrigan represented RBC at Tuesday’s council meeting. Peter Franklin, bond counsel for Modrall Sperling law firm, was also available to answer questions.
The par amount (principal) of the bonds was $38,235,000. The majority were sold to major investors Tuesday morning. The $4 million in bonds remaining with the underwriters will be sold at a later date.
The majority of the bonds were also sold at a premium, netting $43 million for the county. The county is investing an additional $6.7 million from the debt service fund, bringing the total amount in escrow for paying off the principal to $49.7 million. The cost of issuing the new debt is approximately $400,000.
The new bonds also have a call feature, so all the bonds that mature after 2023 are callable.
“That’s an important element for us given the structure of the lab’s contract, because it does expire in 2026,” Lynne said. “So if there’s any sense that the contractor might turn over, we have the ability to restructure our debt.”
When staff approached council with the refinancing proposal during the April budget hearings, the anticipated savings were $1.7 million. However, the bond market has deteriorated during the intervening weeks and is expected to decline further.
“The deteriorating market rate is due to underlying international and national economies, a stronger housing market as well as a roaring stock market,” Harrigan said. “When investors are looking for where to put their money, it’s hard to discount the fact that the stock market is up 20 percent from the beginning of the year.”
“We had been given a target of 3 percent in net present value savings. The net present value savings is when you compare the two cash flows between the old debt service and the new debt service, discounted back, what’s our economic benefit? The $1,151,198 is slightly below the 3 percent at 2.87 percent,” Lynne said.
“We really deliberated about whether the dollar amount was most important to us or that target percentage. In the end we thought the dollar amount was close enough to what we were looking for, and a few tenths of a percentage below the 3 percent was acceptable. There’s still substantial savings here and we thought it was appropriate to move ahead.”
Before the sale, the county submitted the bonds for rating to Moody’s Investors Service and Standard & Poor’s Ratings Services, the same companies that rated the original bonds.
The companies were split in their ratings for both the original bonds and the new ones.
“We have to submit everything that is going on in the county in order for them to rate the bonds,” Lynne said. “So both companies had the same facts to work with but they interpreted those facts differently.”
The S&P rating was unchanged at AA+, indicating that the service “views the outlook for this rating as stable.”
Moody’s initial rating was lower, at Aa3, and the new rating was downgraded one notch to A1. Moody’s analysis attributes the lower rating to “the volatility of the revenue base that is expected to experience significant declines” and “concentrated revenue susceptible to federal budget reductions.”
S&P does address those issues. It lists “potential revenue volatility related to federal budget deficit reduction measures as well as the current five-year LANL contract term and subsequent possibility of a change in contract entity to nonprofit from for-profit, which officials estimate could significantly reduce GRT revenues” and “Los Alamos County’s low levels of retail sales on a per capita basis, reflecting the limited diversity in GRT revenue sources” as offsetting factors that could affect the rating in the future.
However, S&P felt those factors were offset by the county’s available general fund balance ($17.6 million in FY2012). “We consider (that) very strong at 25 percent of operating expenditures and net transfers, including a designated fund balance for revenue stabilization and a one-twelfth reserve mandated by the state for cash requirements.”
Both companies noted the same strengths for the county.
Moody’s lists those as a “moderately-sized economic base anchored by the presence of Los Alamos National Labs” and “strong maximum annual debt service coverage.”
S&P defines the county’s strengths as “historical stability provided by the presence of the Los Alamos National Laboratory, which provides about 70 percent of the county’s total GRT revenues” and “strong maximum annual debt service coverage and no plans for additional debt.”
Moody’s would consider raising the rating if the county achieves “material growth in the pledged revenue stream” and “expansion and diversification of the county’s economy.”
“The fact that there is this split rating is part of the environment that had to be factored in to how we restructured the refinancing,” Lynne said. However, Lynne believes the downgraded rating from Moody’s played only a small role in the refinancing rates for the bonds.
The bond purchase agreement with RBC was signed by council Chair Geoff Rodgers at the conclusion of Tuesday’s meeting.