City of Philadelphia Achieves over $14 Million in Savings through Successful Refunding of Bonds
PHILADELPHIA – The City of Philadelphia sold $118 million of General Obligation (GO) refunding bonds last week, garnering $14.6 million in net present value savings for the City over the next 14 years.
Through aggressive pricing, the taxable bonds achieved a total borrowing cost of 2.88% and total demand from investors exceeding $600 million, more than five times the amount of bonds issued.
This exceptional demand for Philadelphia bonds allowed the City to command lower overall interest rates on the bonds leading to an estimated $1 million in additional net present value savings for taxpayers compared to pre-pricing estimates.
“The high demand for Philadelphia Bonds by the investor community continues to validate the steps this administration has taken to improve the fiscal health of the City. This transaction is also a great example of excellent execution by the underwriter,” according to Philadelphia City Treasurer Christian Dunbar.
The City’s improved financial position had a direct impact on the demand for the bonds and on the low interest rates. The Series 2020A Bonds’ 2.88% all in borrowing yield represented a spread to U.S. Treasuries, the industry-accepted benchmark for taxable bonds, of 0.85% for the 10-year maturity, which is a 0.25% improvement compared to the City’s last taxable bond sale in September 2018.
In addition, the City achieved spreads to U.S. Treasuries similar to those achieved by a higher-rated Pennsylvania issuer which also priced in the same week. The City was also able to capitalize on favorable market conditions. Since 1980, interest rates on the 10-year US Treasury have only been lower than its current rate approximately 5% of the time.
Ahead of the sale, S&P Global Ratings improved its outlook on the City of Philadelphia’s GO and General Fund-Supported Bonds to Positive while affirming its ‘A’ rating. Fitch Ratings and Moody’s Investors Service maintained their ‘A-’ Positive and ‘A2’ Stable ratings, respectively. The Positive outlooks signal the potential for a future ratings upgrade if the City continues to improve its fiscal health.
In recent rating reports, all three agencies cited the City’s strong financial performance, noting sound financial management, continued progress on pension funding, and improved reserve levels, while cautioning that Philadelphia’s fund balance still lags behind its peers.
The S&P press release noted, “Should Philadelphia continue its pension funding discipline, reserve level growth, and preparation for a turn in the economic cycle, we could raise the rating. If revenues stagnate or decline within the outlook horizon, effective management of expenditures and obligation contributions in the face of economic challenges could also lead to an upgrade.”
The 2020A bonds were sold by an underwriting syndicate led by Wells Fargo, with Ramirez & Co. serving as co-senior manager. The sale closed on January 16, 2020.