HomeMy WebLinkAboutIR 10601 INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 21-10601
To the Mayor and Members of the City Council June 22, 2021
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rrn SUBJECT. FINAL RESULTS OF PRICING AND RATINGS ON BONDS WITHIN
THE 2021 DEBT PLAN
Overview
This informal report is intended to provide the Mayor and City Council with a summary of the final pricing
results on bonds issued in connection with the City's 2021 Debt Plan (IR 21-10557), including: Water and
Sewer System Revenue Refunding and Improvement Bonds, Series 2021; General Purpose Refunding &
Improvement Bonds, Series 2021; General Purpose Refunding Bonds, Taxable Series 2021; Combination
Tax and Revenue Certificates of Obligation, Series 2021; and Tax Notes, Series 2021 C. These were
authorized by City Council on April 13, 2021. Additionally, this report summarizes the credit rating agency
actions along with key highlights from the rating report commentary.
Executive Summary
With the assistance of the City's co-financial advisors, Hilltop Securities Inc., and Estrada Hinojosa & Co.,
the City took bids on the bonds on June 81" and June 91". As the following bid results will demonstrate, the
sales were a significant success as evidenced by the number of bids received and the final borrowing
costs (as measured by the True Interest Cost). The sale results generally reflect the lowest borrowing
costs the City has ever seen, further supporting a successful refinancing and restructuring of the recently
issued tax notes used to purchase the new city hall. The City used separate competitive sale processes
for each of the five debt offerings. Below is a summary of the bid results:
True Interest Number of
Bond Issue Amount Sold Cost TIC Bids Received Winning Bidder
W&S Revenue Bonds $ 154,720,000 1.70% 7 Citigroup
GO Bonds (Tax Exempt) $ 152,105,000 1.54% 6 Morgan Stanley
GO Bonds (Taxable) $ 26,175,000 1.94% 10 SAMCO
Certificates of Obligation $ 16,100,000 1.89% 9 BOK Financial
Tax Notes $ 14,620,000 0.54% 9 BOK Financial
Prior to offering the bonds for sale, the City sought credit rating opinions from Kroll (General Obligation
only), Fitch Ratings and Standard & Poor's. Consensus credit strengths of the City's property tax secured
(GO) debt include strong financial management, very strong financial flexibility as evidenced by general
fund reserves and strong liquidity. Related to the water and sewer credit, credit strengths include strong
management, a solid operating track record, and strong liquidity. There has been significant improvement
in the funding status of the pension fund in the past few years driven by increased City and employee
contributions and various benefit changes. While the rating agencies recognize this improvement, they
continue to view the liability as a credit concern. Ultimately, each of the rating agencies affirmed the
existing ratings of the City: GO ratings of AA+/AA/AA (Kroll/Fitch/S&P) and W&S ratings of AA/AA+
(Fitch/S&P). For context, below is the investment grade rating scale:
................ ............. ..........
FORT WORTH
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB-
Prime High Investment Grade Medium Investment Grade Lowlnvestment Grade
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 21-10601
To the Mayor and Members of the City Council June 22, 2021
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THE 2021 DEBT PLAN
Detailed Sale Results
Series 2021 Water& Sewer Revenue Refunding Bonds—
The City's Water and Sewer System issue (AA+/AA) priced with an average life of 11.13 years and a TIC
of 1.703%. To summarize the transaction, the City sold a total of $116,180,000 in bonds plus premium to
fund various improvements to the water and sewer system totaling $126,800,000. Additionally,
$38,540,000 was also issued for the purpose of refunding $43,045,000 of existing bonds, which resulted in
net present value debt service savings of $6,439,759 or 14.96% of the refunded principal amount. The
Series 2021 bonds were sold with a premium such that the total proceeds generated was $170,453,697.
Bids were received from seven firms. The chart below depicts the firm and the associated true interest cost:
Bidder TIC
Citigroup Global Markets Inc. 1.7030%*
Morgan Stanley & Co, LLC 1.7033%
Mesirow Financial, Inc. 1.7434%
Huntington Securities, Inc. 1.7457%
Bank of America Merrill Lynch 1.7479%
Robert W. Baird & Co., Inc. 1.7671%
J.P. Morgan Securities LLC 1.7681%
Adjusted due to post bid award re-size
Citigroup Global Markets Inc. was the winning bidder.
Series 2021 General Purpose Refunding Bonds—
The City's General Purpose (GO) issue (AA/AA/AA+) priced with an average life of 8.75 years and a TIC
of 1.54%. To summarize the transaction, the City sold a total of $76,605,000 in bonds to fund projects
authorized under the 2018 Bond Programs totaling $83,170,000. Additionally, bonds were sold for the
purpose of refunding $8,625,000 of existing bonds, which resulted in present value debt service savings of
$409,173 or 4.74% of the refunded principal amount. A portion of this refunding also refunded and
restructured $74,000,000 of the 2021A Tax Notes issued earlier this year. The Series 2021 bonds were
sold with a premium such that the total proceeds generated was $166,435,824.
Bids were received from six firms. The chart below depicts the firm and the associated true interest cost:
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 21-10601
To the Mayor and Members of the City Council June 22, 2021
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THE 2021 DEBT PLAN
Bidder TIC
Morgan Stanley & Co, LLC 1.5394%*
Citigroup Global Markets Inc. 1.5405%
Bank of America Merrill Lynch 1.5435%
Wells Fargo Bank, National Association 1.5436%
J.P. Morgan Securities LLC 1.5478%
Robert W. Baird & Co., Inc. 1.6518%
Adjusted due to post bid award re-size
Morgan Stanley & Co, LLC was the winning bidder.
Series 2021 General Purpose Refunding Bonds (Taxable)—
The City's General Purpose Taxable (GO) issue (AA/AA/AA+) priced with an average life of 9.28 years
and a TIC of 1.94%. To summarize the transaction, the bonds were sold for the purpose of refunding
$6,635,000 of existing taxable bonds, which resulted in present value debt service savings of$993,316 or
14.97% of the refunded principal amount. A portion of this refunding also refunded and restructured
$26,000,000 of the 2021 B Taxable Tax Notes issued earlier this year. The Series 2021 bonds were sold
with a premium such that the total proceeds generated was $26,194,941.
Bids were received from ten firms. The chart below depicts the firm and the associated true interest cost:
Bidder TIC
SAMCO Capital Markets 1.9397%*
Raymond James & Associates, Inc. 1.9747%
Robert W. Baird & Co., Inc. 1.9834%
BOK Financial Securities, Inc. 2.0174%
Citigroup Global Markets Inc. 2.0176%
PNC Capital Markets 2.0343%
Bank of America Merrill Lynch 2.0517%
Frost Bank 2.0984%
Fifth Third Securities, Inc. 2.1178%
Wells Fargo Bank, National Association 2.1494%
Adjusted due to post bid award re-size
SAMCO Capital Markets was the winning bidder.
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 21-10601
To the Mayor and Members of the City Council June 22, 2021
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rrn SUBJECT. FINAL RESULTS OF PRICING AND RATINGS ON BONDS WITHIN
THE 2021 DEBT PLAN
Series 2021 Combination Tax and Revenue Certificates of Obligation—
The City's Certificate of Obligation (CO) issue (AA/AA/AA+) priced with an average life of 7.345 years and
a TIC of 1.89%. To summarize the transaction, the bonds were sold for the purpose of financing
$18,500,000 of improvements to Trinity Boulevard. The Series 2021 bonds were sold with a premium such
that the total proceeds generated was $ 18,610,666.
Bids were received from nine firms. The chart below depicts the firm and the associated true interest cost:
Bidder TIC
BOK Financial Securities, Inc. 1.1885%*
J.P. Morgan Securities LLC 1.1971%
The Baker Group 1.1989%
Raymond James & Associates, Inc. 1.2003%
Huntington Securities, Inc. 1.2059%
Bank of America Merrill Lynch 1.2096%
Jefferies LLC 1.2128%
Robert W. Baird & Co., Inc. 1.2264%
PNC Capital Markets 1.2758%
"Adjusted due to post bid award re-size
BOK Financial Securities, Inc was the winning bidder.
Series 2021 Tax Notes—
The City's Tax Note (GO) issue (AA/AA/AA+) priced with an average life of 3.85 years and a TIC of 0.54%.
To summarize the transaction, the City sold a total of $14,620,000 in bonds to pay for Public Works
contractual obligations totaling $17,000,000. The Series 2021 tax notes were sold with a premium such
that the total proceeds generated was $ 17,119,524.
Bids were received from nine firms. The chart below depicts the firm and the associated true interest cost:
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 21-10601
To the Mayor and Members of the City Council June 22, 2021
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THE 2021 DEBT PLAN
Bidder TIC
BOK Financial Securities, Inc. 0.5418%*
J.P. Morgan Securities LLC 0.5560%
Ke Banc Capital Markets 0.5803%
PNC Capital Markets 0.5940%
Jefferies LLC 0.5950%
Huntington Securities, Inc. 0.6069%
Raymond James & Associates, Inc. 0.6083%
Robert W. Baird & Co., Inc. 0.6111%
The Baker Group 0.7120%
Adjusted due to post bid award re-size
BOK Financial Securities, Inc. was the winning bidder.
Overview of Rating Outcomes
As part of the City's 2021 debt plan, the city sought ratings for the bonds from three of the four rating
agencies: S&P Global (S&P), Fitch Ratings (Fitch), and Kroll Bond Rating Agency (Kroll). Kroll only rated
the City's General Purpose Bonds, Certificates of Obligation and the Tax Notes.
This year's discussion with the rating agencies continued the financial and economic impacts stemming
from the COVID-19 pandemic as well as the 2021 Winter Strom. Similar to prior rating meetings, the
analysts also revisited the City's pension and OPEB obligations, noting an ongoing credit weakness that is
somewhat exacerbated by current economic conditions related to the pandemic. None of the ratings
changed from 2020, however Kroll revised the outlook to Stable from Positive, citing a modest increase in
the City's debt profile driven by overlapping debt issuance. It also incorporates the uncertainty facing the
City, like many municipalities, as it emerges from the COVID-19 pandemic; federal stimulus funds are
exhausted; and an ultimate, post-pandemic economic recovery takes hold.
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 21-10601
To the Mayor and Members of the City Council June 22, 2021
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THE 2021 DEBT PLAN
S&P
GO Rating —Affirmed rating of AA with a `stable' outlook (no change)
The rating reflects S&P's assessment of Fort Worth's:
• Adequate economy, with access to a broad and diverse metropolitan statistical area (MSA);
• Very strong management, with strong financial policies and practices under our Financial
Management Assessment (FMA) methodology;
• Adequate budgetary performance, with a slight operating deficit in the general fund and an
operating deficit at the total governmental fund level in fiscal 2020, after adjusting for unfunded
pension costs;
• Very strong budgetary flexibility, with an available fund balance in fiscal 2020 of 22% of operating
expenditures;
• Very strong liquidity, with total government available cash at 109.1% of total governmental fund
expenditures and 8.4x governmental debt service, and access to external liquidity we consider
exceptional;
• Very weak debt and contingent liability profile, with debt service carrying charges at 11.4% of
expenditures and net direct debt that is 96.2% of total governmental fund revenue, as well as a
large pension and other postemployment benefit (OPEB) obligation and the lack of a plan to
sufficiently address it; and
• Strong institutional framework score.
"Despite early expectations for substantial negative implications, both economically and financially, Fort
Worth has been able to weather the COVID-19 pandemic reasonably well. Most affected was the city's
tourism department and consumer-related revenues such as hotel taxes and parking fees, although the
net effect to revenues was fairly minimal, with sales taxes coming in better than projected and no major
decreases to property tax receipts, the city's primary source of revenue. Valuations in the city continued to
rise, propelled by continued development and expansion in the industrial and manufacturing sectors. The
growth and strengthening of its economy in recent years, and subsequent increase in revenues has
allowed Fort Worth to reduce its overall tax rate, build its reserves position, and allocate more funding to
fixed costs, in particular for pensions. Continuing the trend of prior years, it managed to increase its
general fund balance in fiscal 2020, ending the year much stronger than initially projected. As a result,
reserves remain very strong, totaling 22% of expenditures at year-end. The city's strong finances are
supported by sophisticated policies and planning mechanisms that are forward-looking and conservative.
The stable rating outlook reflects our expectation that, even when considering poor pension funding and
the potential for increased fixed costs, with operations remaining stable through the current budget year,
Fort Worth's favorable reserve profile and thriving local economy will continue to provide additional near-
term flexibility and lend stability to its overall credit profile."
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 21-10601
To the Mayor and Members of the City Council June 22, 2021
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THE 2021 DEBT PLAN
Upside scenario
We could raise the rating if the city's pension funded status improves significantly and it begins making its
ADC, without reserve levels deteriorating, and it experiences continued economic improvement that
results in economic metrics that are comparable with those of higher-rated peers, assuming all other rating
factors improve or remain stable.
Downside scenario
If the city is unable to make prudent and timely adjustments to its budget, and subsequent deterioration to
budgetary performance, available reserves or cash are realized, we could lower the rating. We could also
do so if its recent pension modifications do not show progress toward making the actuarially determined
contribution (ADC), or if the net pension liability continues to grow.
Water Rating —Affirmed rating of AA+ with a `stable' outlook (no change)
"In our view, Fort Worth benefits from high growth rates and its position as a wholesale water provider, as
well as strong management practices that contribute to stable operations, significant cash on hand, and
strong coverage levels supportive of the rating. Despite the challenges of the pandemic-driven recession
and recent winter storm, the city has remained financially stable, and used these challenges as learning
opportunities to continue improving its planning and emergency procedures. For the utility system, the
winter storm led to boil-water advisories as power outages caused pressure loss in parts of the system.
Management reports there are no material financial impacts expected from the storm, however, the event
highlighted the need to increase investment in replacement of cast iron pipes and certain critical
equipment, which will be factored into the city's capital improvement planning."
"The stable outlook reflects our expectation that Fort Worth will adapt to changing conditions and fund its
capital program while maintaining coverage and cash position based on its track record and forward
planning."
Upside scenario
A higher rating would be predicated in large part on sustained improvement in addressing the pension
liability while still maintaining strong operations and extremely strong all-in coverage and liquidity metrics.
Downside scenario
We could lower the rating should coverage and liquidity deteriorate to levels we view as no longer
supportive of the current rating. We could also lower the rating if there is an increased reliance on the
utility's surplus net revenues by the general government, either to subsidize general fund operations or to
shore up fiduciary funds.
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 21-10601
To the Mayor and Members of the City Council June 22, 2021
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THE 2021 DEBT PLAN
Fitch
GO Rating — Rating affirmed at AA, with a `stable' outlook. (no change)
"The 'AA' Issuer Default Rating (IDR) and limited tax bond rating reflect the city's strong operating profile
as well as sold economic and revenue growth prospects. The rating also incorporates elevated pressure
on the expenditure flexibility assessment. Increasing pension contributions are driving carrying costs
higher, which could weaken this assessment. The rating also reflects Fitch Ratings' expectation of
budgetary adjustments to maintain strong operating profile, as well as solid economic and revenue
prospects as normal business conditions resume."
Factors that could, individually or collectively, lead to positive rating action/upgrade:
• A closing of the current gap between actual and actuarially determined pension contributions
(ADCs) and a reduction in the current projected 42-year amortization period to one closer to the
30-year industry standard.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
• While not expected, an erosion of post-pandemic economic prospects that weakens the recently
strong revenue growth trend.
• A reversal of the recent positive operating performance and resulting decline in resilience cushion
below a level consistent with the 'AA' rating.
• An increase in the long-term liability burden that weakens the current assessment.
Water Rating —Assigned and affirmed Water's rating of AA with a `stable' outlook (no change)
"The system's 'AA' bond rating and 'aa' SCP assessment reflect a very strong leverage profile within the
business framework of very strong revenue defensibility and very low operating risk. Leverage, defined as
net adjusted debt to adjusted funds available for debt service, has continued a favorable declining trend,
averaging 4.6x since 2018. This favorable trend has been supported by improving cash balances. The
system has a high degree of rate affordability, and the city retains legal autonomy to raise rates. The area
continues to see strong growth with five-year CAGR of 2.5%. The operating cost burden is very low but
influenced by its dependence on wholesale service providers."
"Notwithstanding distortion in the days-on-hand metric, cash balances did see improvement in Fiscal
2020, growing to over$150 million, the highest level over the past five years. The city adopted a minimum
cash balance policy in Fiscal 2015, and has seen continuous improvement since that time."
"After holding rates flat in Fiscal 2021, the city expected to resume annual rate adjustments. However, due
to expected expenditure reductions, continued growth-related revenue improvement and debt service
savings, the city does not anticipate adjusting rates until Fiscal 2025. The system's capital improvement
plan (C/P) is about 10% greater than the prior year's plan and will be about 50% debt funded. Fitch's
forward scenario points to leverage growing slightly but remaining relatively favorable around 5x to 6x."
Factors that could, individually or collectively, lead to positive rating action/upgrade:
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 21-10601
To the Mayor and Members of the City Council June 22, 2021
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• Sustained trend of leverage that approximates 5.Ox to 6.Ox in Fitch's base and stress scenarios,
assuming stability in the revenue defensibility and operating risk assessments;
• Evidence of greater stability in operating performance.
• Continue strong growth in customer connections leading to higher connection fee revenue.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
• An increase in leverage that consistently exceeds 9.Ox in Fitch's base and case scenarios,
assuming stability in the revenue defensibility and operating risk assessments.
Special Tax Rating —Affirmed at AA, with a `negative' outlook. (no change)
"The Negative Outlook on the special tax revenue bonds is due to the sharp decline in pledged hotel
occupancy tax (HOT) revenues for the latter part of Fiscal 2020 and Fiscal 2021 and resulting diminished
resilience cushion. While the city reports available reserves to assist with debt service payments on the
series 2017A and series 2017B bonds for at least the next several years (currently reported at more than
$42 million or nearly 3x maximum annual debt service [MADS]), a slower than expected economic
recovery will require application of these monies for debt service and will limit options for future payments
if hotel occupancy and venue operations are slow to rebound. The 'AA' rating reflects the currently solid
resilience cushion and strong longer-term pledged revenue growth prospects."
Kroll
GO Rating —Affirmed rating of AA+ with a revised `stable' outlook (changed from positive)
"The City's long-term rating reflects strong financial management policies and practices, experienced
leadership, and very strong financial performance and liquidity measures. Economic growth is robust,
fostering improvement in the resident wealth base. While overall debt levels have increased, they remain
moderate and benefit from rapid amortization. In KBRA's opinion, fixed costs should remain manageable.
The Outlook revision to Stable reflects the aforementioned modest increase in the City's debt profile. It
also incorporates the uncertainty facing the City, like many municipalities, as it emerges from the COVID-
19 pandemic; federal stimulus funds are exhausted; and an ultimate, post-pandemic economic recovery
takes hold. Progress made by the City to implement sweeping pension reforms continues to be viewed
favorably by KBRA, with an expectation of improving funding metrics over time. Moreover, KBRA believes
the City enters a post-pandemic economic environment from a position of financial strength, benefiting
from continued resource and tax base growth."
Key Credit Strengths:
• Strong financial management policies and an experienced, effective management team.
• Robust economic growth, evidenced by a diverse, growing tax and resource base, and
unemployment rates which have historically trended below the State average.
• Strong financial reserves and liquidity, aided by conservative budgeting practices and formal fiscal
policies and monitoring practices.
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 21-10601
To the Mayor and Members of the City Council June 22, 2021
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THE 2021 DEBT PLAN
Key Rating Concerns:
• Ability to absorb increasing pension contributions while maintaining financial strength.
• Reliance on sales taxes exposes the City's revenue base to economic fluctuations; deviation from
conservative budgeting practices would also increase risk.
• Unknown, ultimate pandemic impact on the property tax base.
Drivers for Rating Change:
• Sustained, strong financial performance despite any economic downturns. (+)
• Continuing progress in transitioning to a new pension funding model, with minimal impact to the
City's financial position from new risk sharing mechanism. (+)
• Management's ability to adapt to new property tax levy limitation without significant operational
impact. (+)
• Economic decline or tax base growth stagnation causing a significant reduction in tax revenues (-)
The rating reports are accessible online at https://www.fortworthtexas.gov/departments/finance/financial-
reports#section-2
Next Steps
We are pleased to share excellent bond pricing results. Special thanks to city staff, the City's financial
advisors, and outside counsel for their hard work and dedication to these successful debt transactions.
The City will continue the 2021 debt plan and related bond sales with final closing and delivery of funds
scheduled to occur on July 131" (GO) and July 141" (Water).
If you have any questions, please contact Reginald Zeno, Chief Financial Officer, at 817-392-8500.
David Cooke
City Manager
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS