Value Delivered:

Facing several logistical and financial challenges for the sale of a $14.3 million Tax Allocation Bond (TAB) in 2008, the Sonoma County Community Redevelopment Agency turned to KNN Public Finance for assistance. The issue’s challenges included a relatively small project area of 323 acres, an annual and cumulative cap on tax increment imposed by its redevelopment plan, uncertainty regarding the size and timing of the project to be financed, and a difficult real estate and credit market.

Although Sonoma County typically employs competitive sales for its debt, KNN recommended a negotiated sale for this bond due to the turmoil in the municipal markets. KNN also assisted the Agency by structuring the transaction; developing and coordinating the rating presentation and subordination process with taxing entities; and recommending the appropriate legal covenants prior to the underwriter request for proposals selection process. Thus, the underwriter spread could be devoted to takedown and placement of the bonds rather than any management expense, saving the Agency thousands of dollars.

   
Strategic Implementation:

The Agency had received an “A-” rating from Standard & Poor’s just one year prior to this transaction. However, KNN secured an upgrade to “A+” by presenting the rating agency with evidence of:

• Sonoma County’s low taxpayer concentration

• Consistent assessed value growth even during prior recessions

• “Banked” value in the area as a result of Proposition 13

• Strong County management

• Robust real estate values in the surrounding area

“KNN’s assistance throughout the entire process was critical to the success of this bond issuance for us. Because our project was already underway, we needed the certainty of obtaining the required funds in the midst of historically uncertain times in the market,” said Kathleen H. Kane, Executive Director of the Sonoma County Community Development Commission. “With KNN’s guidance, we were able to structure a successful sale with built-in flexibility to respond to future changes in the level and timing of our funding needs, and in market conditions.”

The primary project to be financed with this TAB was an improvement to a state highway which required negotiations with Caltrans as well as the acquisition of right of way. Although the first phase of the project had been awarded, there was uncertainty regarding the size and timing of the project’s final phase. Fortunately, the Agency’s cash on hand provided it with more flexibility than that experienced by many agencies. To mitigate borrowing too much and being limited on the use of proceeds, capitalized interest was funded for three years and the project was downsized by a similar amount.

This approach freed up tax increment to fund the project, if necessary, but also allowed the Agency total flexibility to use tax increment for other purposes if the project came in at the lower end of estimated project costs.

   
Results:

With the financial and real estate markets in turmoil and credit spreads widening, KNN evaluated several alternative scenarios to place the bond structure issues in context. These scenarios included a 5-year vs. a 10-year call and division of the single issue into two issues to fund only the first phase now and postpone entering the market for the second phase until that portion of the project was ready to fund and, presumably, the market would be steadied.

When the scenario planning revealed only a 10-15 basis point penalty for the early call, the Agency chose to include a 5-year call on a single issue. Although the final All-in-True Interest Cost was 6.75%, the shortened call will provide the Agency with greater opportunity to refund the transaction if interest rates return to their long-term norm. Serial bonds up to and including 2023 with par amounts of less than $500,000 were sold predominantly to retail investors. The term bonds in 2028 and 2034 with par amounts of $3.2 million and $5.5 million, respectively, were sold to institutional investors.