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Fresno County: Competitive Sale of Taxable Auction-Rate POBs
Value Delivered:
In early 2006, Fresno County sought assistance from KNN regarding strategies to mitigate interest rate risk associated with its $75 million Taxable Pension Obligation Bonds Series 2004 B, which were issued as 28-day re-set Auction Rate Securities (ARS). Over the course of two years, the County had achieved significant savings from the ARS, with rates as low as 1.09%. However, on the heels of successive Federal Reserve Board rate increases, the County's auction rate reached a high of 5.17% in August 2006.
After extensive analysis, KNN structured and brought to market a fixed rate conversion of the County's $75 million taxable auction rate POBs. This was the first California County taxable POB transaction sold in California by way of competitive sale and enabled the County to secure a low fixed interest rate of 5.58% while eliminating future interest rate risk.
Strategic Implementation:
KNN analyzed several different approaches to mitigating the County's interest rate risk, ranging from a fixed rate conversion of some or all of the outstanding ARS to various strategies employing LIBOR-based swaps. KNN recommended a fixed-rate conversion under the County's 2004 POB Multi-Modal Trust Agreement provisions to ensure that County could issue the bonds under its existing bond insurance policy, saving significant costs for the County.
After a very careful analysis of the market for taxable municipal bonds, KNN determined that the County could effectively sell its POB conversion by way of competitive sale. This conclusion ran contrary to past industry practice and conventional wisdom that POBs must be sold by way of negotiated sale. As discussed below, the sale was an unqualified success.
Results: As illustrated below, the County received 11 bids for the bonds and secured a low TIC of 5.58%. The bonds priced at a spread of 62.75 basis points over the 30-Year Treasury Bond yield, lower than many comparable POBs sold within the past year.
The 18 basis point spread between the best and worst bid resulted in more than $2.6 million of interest cost savings to the County. Moreover, six of the bids were clustered between 5.5982% and 5.6054%. With a spread of only 0.0072% between the highest and lowest, it is clear that this range was reflective of the market for the Bonds that day. However, the competitive nature of the sale provided the opportunity for underwriting firms to be more aggressive and bid through the "market" in order to win the transaction.
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