NEW ORLEANS, LA—This week, the City of New Orleans set final interest rates for $195,885,000 of refunding taxable fixed-rate bonds. The move reduces the overall level of debt service related to the outstanding pension obligation bonds from the $19 million budgeted in 2012 to a locked in annual expense of approximately $17 million. Unlike the previous transaction, these interest rates are fixed and will not vary with market fluctuations.
“When Mayor Landrieu took office in May 2010, he took over a city government that had spent every penny of its reserves along with $300 million in state and federal loans and still had a $100 million budget gap to close with only seven months left in the fiscal year,” said First Deputy Mayor and Chief Administrative Officer Andy Kopplin. “Meanwhile, the city faced balloon payments on $115 million in debt and a termination payment now estimated at $46 million which were coming due and payable in full in early 2013. Yesterday's bond sale represents a significant milestone in restoring the City’s credit and cleaning up the balance sheet on the City’s books.”
The City received significant interest in the bonds, receiving orders from both retail investors and institutional investors to purchase the debt. The average coupon on the bonds sold Thursday was 4.18% for an average life of just over 11 years. Principal repayments for the refunding will begin in 2015, with no extension of the 2030 maturity of the original pension bonds.
In addition to providing $126M to refund the outstanding Series 2000 variable rate pension obligation bonds, the sale will also provide a $46 million swap termination payment to PaineWebber Capital Inc., and refund $16 million of bonds issued in late November 2011 to refinance certificates of obligation from 1998. The City also funded a Debt Service Reserve Fund to enhance the Bond’s credit rating and a Capitalized Interest Fund. The refunding also allows the City to avoid a $115 million bullet payment on the bank-mode pension debt that would have been due in spring 2013 had the bonds not been refunded.
The City’s recently improved credit ratings from Standard & Poor’s Rating Services and Moody’s played a part in the positive bond sales results.
“That this bond sale achieved strong ratings from Moody’s, Fitch and Standard and Poor’s validates that we have put our fiscal house in order,” Kopplin added. “It gets the city out of risky financial structures, removes the financial gun from our head and, most importantly, saves taxpayers money.”
Debt service on the refunding bonds will be supported by a property tax authorized for New Orleans by the Louisiana state constitution. The constitutional general municipal purpose tax, also known as the alimony tax, is expected to generate $36 million in 2012.
The closing date for the Bonds is October 23, 2012.