Philadelphia Achieves Historically Low Rates in Bond Sale

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The City of Philadelphia achieved historically low interest rates in a bond issue this past week, allowing it to borrow money for crucial investments such as streets, parks and recreation facilities, and police facilities at less cost to taxpayers.

Rates for the $293.4 million borrowing were about 0.63% lower than rates on the City’s last General Obligation borrowing, meaning the City’s costs were approximately $15.9 million lower on this transaction. The lower rates were tied to exceptional demand for Philadelphia bonds, with total orders from retail and institutional investors exceeding $3.1 billion, more than ten times the amount of bonds issued.

“The strong demand for City’s bonds is an indicator that investors have a long-term positive outlook for Philadelphia. It is driven, in part, by the responsible financial management of the Kenney Administration,” said City Treasurer Christian Dunbar. “This directly translates into cost savings for taxpayers.”

Ahead of the sale, Fitch Ratings maintained its positive outlook and ‘A-’ rating on the City of Philadelphia’s General Obligation (GO) and General Fund-Supported Bonds, while Moody’s Investor Services and S&P Global Ratings also affirmed their Stable outlooks on the City’s credit ratings of ‘A2’ and ‘A’ respectively.

In recent rating reports, all three agencies cited the City’s strong financial performance, noting strong 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, “The stable outlook reflects our view of Philadelphia’s continued improvement of its financial cushion, bolstered by what we view as strong management.” Fitch noted the potential for an upgrade “if the city is able to consolidate those improvements as spending pressure ramps up, including for pension costs, new labor contracts, and the school district.”

The improvement in the City’s financial position had a direct impact on the demand for the bonds and on the historically low interest rates. The Series 2019B Bonds’ borrowing yields represented a spread to the MMD index, an industry accepted tax-exempt benchmark of yield on the strongest rated AAA credits, of 0.46% for the 20-year maturity, which is 0.20% improvement than that achieved in the City’s last new money bond sale in November 2018. The overall interest cost was 2.82% on the Bond issue, which has a 20-year final maturity.

The 2019B bonds were sold by an underwriting syndicate led by Bank of America Merrill Lynch, with Ramirez & Co. serving as co-senior manager. The sale closed on Aug. 8, 2019.

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