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Bond Market Snaps Up Sandag’s Latest Offering

A yield-hungry market recently gobbled up $350 million in bonds issued by the San Diego Association of Governments that pays an average of 3.85 percent over the 34 years the debt will be in place.

Indeed, demand for AAA-rated municipal bonds was such that Sandag, the regional transportation planning agency, received an additional $54 million in premiums mainly from institutional investors such as insurance companies and mutual funds, said Andre Douzdjian, Sandag’s director of finance.

“Investors want to get a specific rate of return and in a low interest rate environment that we’re in, you have to pay extra cash to get that yield,” Douzdjian said.

Most AAA-rated debt is being sold at a premium meaning the investors are paying additional cash above the face value of the bonds to secure the favorable interest rate yield.

Because of the additional premiums from investors, the bonds generated a total of $404 million for the agency.

Sandag is borrowing the money to finance a slew of regional transportation improvement projects, the largest of which is a trolley extension from Old Town to University Towne Center. Another key project targeted for the bond funds will add express lanes to Interstate 5 and a new rail line that parallels that freeway for the Coaster.

The 11-mile trolley expansion, which will cost about $2 billion including financing, is on track to have its environmental impact report approved later this year, said Jose Nuncio, Sandag’s director of TransNet.

Construction is not expected to begin until 2016 with an opening planned for 2019.

Sandag obtains funds for the transportation projects from federal and state sources, but the majority derives from a countywide half-cent sales tax known as TransNet that’s was first approved by voters in 1987, and extended in 2004 by 40 years.

The Sandag bond sale completed Aug. 20 was completed in one day instead of the originally estimated two days. “We had orders from 58 investors, the majority of which were institutional but there were also a few retail investors as well,” Douzdjian said. “The investor terms ranged from two years to 48 years.”

Both Standard & Poor’s and Fitch Ratings gave the bonds their highest rating of AAA. Sandag didn’t request a rating from Moody’s Investors Services based on that firm’s downgrading of Sandag’s debt in 2012, Douzdjian said.

Moody’s amended the way that it rated self-taxing agencies such as Sandag, and ascribed an Aa2 rating to the agency, one step below the Aa1 rating that Sandag had previously (which was just below its highest rating of Aaa).

“Their methodology wasn’t in line with what we believed we deserved,” he said. “A new bond offering only needs the ratings of two of the credit rating agencies.”

According to the investor report on the 2014 bonds, Sandag collected about $260 million in TransNet tax revenue for the fiscal year ended June 30, up 5.2 percent from the prior fiscal year. TransNet revenue declined in three consecutive years from 2008 to 2010, but has since recovered, and last year was the highest amount collected.

This was Sandag’s fourth bond issuance since voters extended the tax in 2004. There were six earlier bond issues during the first 16 years the tax was in effect.

The agency’s total debt outstanding is $1.49 billion. Sandag’s annual debt service, or what it pays in principal and interest each year on its outstanding bonds, is $84 million, Douzdjian said.

Given the current low interest rates and the expectation of rising rates starting next year, Douzdjian was asked why doesn’t Sandag borrow much larger amounts and save more taxpayer money.

Figuring out how much to borrow (through bonding) is always a balancing act, he said. “We generally only borrow the amount we expect to spend on average over the next two years,” Douzdjian said.

There are always costs when an agency borrows money and repays debt. The agency is constantly weighing what it could save on issuing debt at lower interest rates compared with what it can earn by investing revenue it collects, and constantly monitoring markets to make the best decisions, he said.

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