Thursday, December 25, 2014

DRPA set to borrow $313M tax-free; drops Build America Bonds: UPDATE

Why aren't more towns refinancing at today's cheap rates

DRPA set to borrow $313M tax-free; drops Build America Bonds: UPDATE

UPDATE: The Delaware River Port Authority sold $313.8 million in bonds rated A- (S&P) / A3 (Moody's). The yields were in the expected range, says Janney's Tom Kozlik. 

Maturity              DRPA Yield     Benchmark yield (7/8 AAA MMD)    Spread
2027                       4.74%                    3.49%                                    1.25%
2040 insured      4.89%                    3.99%                                    .90%
2040                       5.09%                    3.99%                                    1.10%

EARLIER: Jittery investors, fleeing the weak stock market, want to buy municipal bonds. Tax-free, and relatively safe; how often do towns and states go bankrupt? 

But U.S. towns and states are borrowing less money, and selling fewer bonds. So the yields municipal governments have to pay to sell new bonds keep falling. Typical 10-year municipal bonds, with a modest single-A rating, sold at around 3.6% this week, down from 3.8% last week, according to Thomson Reuters's bond data service.

So it looks like a good t time to refinance the trillions towns borrowed in the 1990s and 2000s to build stadiums, schools, and all kinds of political projects, at cheaper rates. But most towns aren't doing that, notes Tom Kozlik, municipal credit analyst at Janney Capital Markets in Philadelphia.

U.S. municipal bond sales fell to around $30 billion last month, from $40 billion last June, as towns start fewer projects. Refinancings are also down: It takes months to refinance a multi-million-dollar bond issue; meanwhile, towns have to park the money in interest-bearing accounts, and investment rates are so low at the moment that a lot of towns don't think it's worth it.

The Delaware River Port Authority hopes to borrow $313 million at lower rates today, through a sales syndicate led by Citigroup and including Janney. DRPA had considered using taxable, federally-subsidized Build America Bonds, but muni rates are more attractive, due partly to investors' uncertainty as to how long the federal "BAB" market is going to continue.

The DRPA's credit is rated a decent-but-not-pristine A- by Standard & Poor's, and an equivalent A3 by Moody's Investor Service.

Moody's worries it may have to cut the rating further, driving up future borrowing costs, partly due to expensive projects like repairs to the Patco High-Speed Line and the Walt Whitman Bridge re-decking, but also due to DRPA's costly past "economic development" projects like the failed FastShip manufacturing project, and to the long-term costs of DRPA's multi-million-dollar interest-rate-swap bets, against Union Bank of Switzerland and the former Lehman Bros., that interest rates would stay high as it paid down its old variable-rate bonds.

In a May report, Moody's analsyt Kristina Alagar Cordero also noted that fewer people have been using DRPA bridges since it jumped tolls to $4, from $3, as the economy began to slow two years ago. She wants the agency to hurry up boosting the tolls again, to $5, so it can pay its mounting finance bills.

Investor Warren Buffett and the chief executive of major-league bond-buyer Allstate have been quoted lately warning that states and towns are going to go bankrupt and institutions that buy too many munis are going to lose money. Kozlik says turnpike bonds and other risky projects sometimes go bad, but states and cities almost never. "There's not going to be a municipal meltdown. Municipal bondsare not subprime loans; they're not dotcom stocks." 

Aren't state and local tax collections down? "It was pretty scary, but they've stabilitzed. They've risen slightly." Still, "the municipal market will take its orders from the overall economy. For towns to start doing projects again, they need a little more optimism about the economic outlook."

 

Joseph N. DiStefano
About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

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