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HomeMy WebLinkAbout(0006) IR 21-10601 - Final Pricing Results and Rating on Bonds YR 2021 Debt PlanINFORMAL REPORT TO CITY COUNCIL MEMBERS No. 21-10601 ypRTE7�tI i ti e `o r rn lip? Overview To the Mayor and Members of the City Council June 22, 2021 Page 1 of 10 SUBJECT: FINAL RESULTS OF PRICING AND RATINGS ON BONDS WITHIN THE 2021 DEBT PLAN 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 8th and June 9th. 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 PRTFA �i f rsrn 1@70L To the Mayor and Members of the City Council June 22, 2021 Page 2 of 10 SUBJECT: FINAL RESULTS OF PRICING AND RATINGS ON BONDS WITHIN 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 PRTFA �i f rsrn 1@70L To the Mayor and Members of the City Council June 22, 2021 Page 3 of 10 SUBJECT: FINAL RESULTS OF PRICING AND RATINGS ON BONDS WITHIN 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 Faro 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 PRTFA �i f rsrn 1@70L To the Mayor and Members of the City Council June 22, 2021 Page 4 of 10 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 PRTFA �i f rsrn 1@70L To the Mayor and Members of the City Council June 22, 2021 Page 5 of 10 SUBJECT: FINAL RESULTS OF PRICING AND RATINGS ON BONDS WITHIN THE 2021 DEBT PLAN Bidder TIC BOK Financial Securities, Inc. 0.5418%* J.P. Morgan Securities LLC 0.5560% KeyBanc 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 Page 6 of 10 SUBJECT: FINAL RESULTS OF PRICING AND RATINGS ON BONDS WITHIN 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 ypRTE7�tI i ti e `o r rn lip? To the Mayor and Members of the City Council June 22, 2021 Page 7 of 10 SUBJECT: FINAL RESULTS OF PRICING AND RATINGS ON BONDS WITHIN 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 ypRTE7�tI i ti e `o r rn lip? Fitch To the Mayor and Members of the City Council June 22, 2021 Page 8 of 10 SUBJECT: FINAL RESULTS OF PRICING AND RATINGS ON BONDS WITHIN THE 2021 DEBT PLAN 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 (CIP) 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 Page 9 of 10 SUBJECT: FINAL RESULTS OF PRICING AND RATINGS ON BONDS WITHIN THE 2021 DEBT PLAN 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 Page 10 of 10 SUBJECT: FINAL RESULTS OF PRICING AND RATINGS ON BONDS WITHIN 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 13th (GO) and July 141h (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