New York City preps $1.5B sale as rating agencies affirm its GOs

As New York City gets set to issue $1.2 billion of fiscal 2024 series C general obligation bonds, rating agencies affirmed the Big Apple’s $40 billion of outstanding GO debt.

Proceeds will be used to fund capital projects; a $309.4 million reoffering will also be sold to convert outstanding floating-rate bonds to fixed-rate securities.

Book-running lead manager BofA Securities is expected to price the tax-exempt GOs on Wednesday after a one-day retail order period.

J.P. Morgan, Jefferies, Loop Capital Markets, Ramirez & Co., RBC Capital Markets, Siebert Williams Shank and Wells Fargo Securities, Academy Securities, Barclays, Blaylock Van, BNY Mellon Capital Markets, Cabrera Capital Markets and Drexel Hamilton are co-senior managers on the deal.

Additional co-managers include Fidelity Capital Markets, Goldman Sachs, Great Pacific Securities, Janney Montgomery Scott, Morgan Stanley, Oppenheimer & Co., Raymond James, Rice Financial Products Co., Roosevelt & Cross, Stern Brothers, Stifel, Nicolaus and TD Securities.

Co-financial advisors are PRAG and Acacia Financial Group. Co-bond counsel are Norton Rose Fulbright and Bryant Rabbino.

The bonds are rated Aa2 by Moody’s Investors Service, AA by S&P Global Ratings and Fitch Ratings and AA-plus by Kroll Bond Rating Agency. All four rating agencies have a stable outlook on the credit.

Along with the issuance of the fiscal 2024 series C bonds, the city will convert its outstanding series 2006J-2, series 2006J-3, series 2008A-4 and series 2008C-4 bonds to fixed-rate from auction-rate and the series 2009B-3 bonds to fixed-rate from adjustable-rate. The series 2006J-2 and 2006J-3 bonds will be renamed series 2006J-A bonds after conversion to fixed-rates.

The city is one of the biggest issuers of municipal bonds in the nation. As of Dec. 31, the city had about $39.7 billion of GO bonds outstanding, made up of 87%, or $34.7 billion, of fixed-rates and 13%, or $5 billion, of variable-rates.

Separately, the city’s Transitional Finance Authority had about $45.1 billion of debt outstanding at the end of the second quarter of fiscal 2023, while the Municipal Water Finance Authority had around $32.3 billion of outstanding debt.

The city uses a three-tiered capital planning process consisting of a 10-year capital strategy, a four-year capital plan and a current-year capital budget. The 2024-2028 capital commitment plan totals $80.7 billion, with 97%, or $76.9 billion, being funded by the city.

The city’s capital plan is financed mostly through the issuance of GOs, TFA future tax secured bonds and MWFA bonds. Under a fiscal 2024-2028 financing plan, the city intends to issue $27.3 billion of GOs, $28.4 billion of TFA bonds and $9.9 billion of MWFA bonds.

Rating agencies are satisfied with the city’s management of its finances and outlook for the near term.

“The AA rating reflects our view of New York City’s substantial economic size and diversity,” said S&P credit analyst Felix Winnekens. “New York City’s excellent universities, first-class health care providers, active finance and venture capital industry, and attractiveness as a leisure and business travel destination support the city’s status as a global employment, financial and tourism hub.”

New York is the largest city in the United States with a population of about 8.34 million as of July 2022 and has the largest school system, with roughly 1 million students. The city’s real GDP of $1.1 trillion is larger than all but four states, according to officials.

“However, with employees’ return to office lagging and office vacancy rates of over 20%, we continue to monitor the potential impact of lower office valuations on the city’s finances,” Winnekens said.

KBRA said its rating took into consideration both credit positives and negatives.

KBRA said credit positives include:

• the city’s role as international business and cultural center commensurate with its status as the nation’s largest city and position as the center of a large metropolitan economy;
• institutionalized policies and procedures support financial stability; and
• long-range financial and capital planning; pension funded ratios and unfunded liabilities have trended positively, while annual debt service requirements continue to be maintained at below 15% of city tax revenues.

The credit challenges, KBRA said, include:

• an economic base that remains susceptible to financial services sector cycles, although financial sector reliance has moderated with increasing diversification of the city’s economic base;
• the financial plan identifies outyear budget gaps, now exacerbated by the asylum seeker crisis, which must be closed;
• absent significant federal and/or state funding to assist the city in handling the continuing influx of asylum seekers, further increases in projected outyear budget gaps are likely. The crisis may also pressure provision of services and have quality of life implications; and
• coastline location and associated exposure to climate change related to rising sea levels and intensifying storms.

Fitch said it considers the city’s unique economic profile as an international center for numerous industries and a major tourism destination, as well as its proven resilience through the recent and prior severe economic disruptions, as credit strengths.
“Employment recovery had lagged national trends following the pandemic, but job growth picked up notably during calendar 2022 and through 2023 and employment in the city has now recovered to pre-pandemic levels,” Fitch said.

Fitch added its ratings “reflect the city’s exceptionally strong budget monitoring and controls, supporting Fitch’s high assessment of operating performance.”

“The city experienced record revenue performance and strong recovery coming out of the pandemic, as well as improvement in reserve levels, which will help management navigate through future economic downturns, including near-term challenges due to an expected deceleration of revenue growth, rising labor and asylum seeker costs and other uncertainties associated with a high inflationary environment,” Fitch said.

Moody’s said its rating affirmation also reflected the “city’s post-pandemic economic recovery, including record-high private employment and ongoing moderate tax revenue growth. It also reflects successful implementation of budget measures to help close budget gaps in the current and succeeding fiscal year primarily caused by the migrant crisis.”

“The stable outlook reflects continuing economic expansion and tax revenue growth, coupled with robust financial management, which is anticipated to help mitigate budget pressures from the migrant crisis and the end of pandemic-era federal aid,” the rating agency said.

The full costs to the city of providing services to migrants during the financial plan period are not known at this time, according to the investor presentation, but the financial plan reflects costs of $4.22 billion, $4.87 billion, $2.5 billion and $1.5 billion in fiscal 2024-2027, respectively.

The financial plan also reflects decreases in certain costs of providing services to asylum seekers of $515 million and $1.23 billion in fiscal year 2024-2025, respectively, according to the roadshow.

The city is continuing to seek additional funding from the state and the federal government for costs associated with the influx of migrants.