The City of Philadelphia saved $21.8 million over the next 18 years while funding an unprecedented $366 million in key infrastructure projects by achieving historically low interest rates in a general obligation bond issue priced on July 27, 2021.
This borrowing is the City’s largest general obligation borrowing ever and will support strategic commitments to new facilities and modernizing of existing assets, prioritizing investments in safety and justice, inclusive growth, and quality government services.
Rates for the $294.7 million tax-exempt Series A Bonds were 0.69% lower than rates on the City’s most recent tax-exempt general obligation borrowing in 2019, as the City took advantage of an extremely low interest rate environment and positive market reception. Exceptional demand for Philadelphia bonds, with total orders from 36 institutional investors exceeding $950 million (3.2 times oversubscribed), helped reduce the borrowing’s interest rates. Ultimately, the City was able to achieve spreads to MMD, the industry accepted tax-exempt benchmark, which were 0.06% less than for comparable maturities on its last tax-exempt transaction.
For the $132.1 million taxable Series B Bonds, the City refunded prior bonds to achieve savings of over $1.3 million per year. As with the tax-exempt bonds, strong demand helped drive these exceptionally low rates; 21 investors placed orders for 2.4 times the amount of bonds issued, helping lower interest rates and increase net present value savings by $4.4 million compared to pre-pricing estimates.
Across both series, orders were placed by 21 investors who did not previously report holding City bonds. The City and its financing team undertook an expanded investor relations campaign as part of this transaction, and 18 investors who took part in the interactive investor presentation submitted orders. The continued expansion of the City’s investor base helps keep interest rates low and demonstrates the market’s overall belief in Philadelphia’s credit.
Ahead of the sale, Fitch Ratings improved its outlook on the City of Philadelphia’s GO and General Fund-Supported Bonds to Stable while affirming its ‘A-’ rating. Moody’s Investors Service and S&P Global Ratings maintained their ‘A2’ Stable and ‘A’ Stable ratings, respectively.
“We were pleased with the strong interest in our credit. Our improved outlook from Fitch also showcases the City’s continued commitment to our long-term financial health,” stated City Treasurer Jacqueline Dunn.
In recent rating reports, all three agencies cited the City’s sound financial management, continued progress on pension funding, strong and diverse economy, and expectation of solid revenue growth post-pandemic. All of the agencies cautioned, however, that despite its pre-pandemic growth, Philadelphia’s fund balance still lags behind its peers and has been further depleted in the last two years. The S&P press release noted the potential for a future upgrade “If general fund reserves were to be restored to 2019 levels and if there was evidence of structural balance in which the city’s recurring revenues were keeping pace with expenditures.”
The 2021A&B Bonds were sold by an underwriting syndicate led by Goldman Sachs, with Ramirez & Co. serving as co-senior manager. PFM Financial Advisors LLC and Phoenix Capital Partners served as financial advisors on the transaction. The sale closed on August 11, 2021.