Municipal Bond Deals Squeezed By Credit Crisis
Thursday, November 29, 2007;Page A01
The widening credit crunch is making it harder for cities and schoolsystems to get money for buildings, ballparks and other vital projectsfrom the $2.5 trillion market for municipal bonds, a sector of Wall Street that rarely sees trouble.
That is leaving them with a tough choice: either put off the projects,or pay higher interest rates on their bonds, a cost that ultimatelywould fall on the backs of taxpayers.
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The problem is affecting municipalities with lower credit ratings, which require them to pay more to borrow money.
Faced with the prospect of paying higher interest rates this month, Chicago canceled a $960 million bond. Miami-Dade Countypulled a $540 million offering for its airport. And the District has a$350 million bond for schools, parks and roads scheduled for next monththat could be delayed if credit conditions continue to deteriorate, atop D.C. finance official said.
Several finance directors said it is unusual for turbulence to hitmunicipal bonds, a tax-exempt investment that has long been consideredsafe.
"There's some unique and maybe even unprecedenteddynamics that have been occurring because of the credit crunch," saidLasana Mack, the District's treasurer.
For the past several years, cities and towns have been able toborrow money by issuing bonds that pay historically low interest rates.That era of easy money is ending for many municipalities, mostlybecause of spiraling losses in the mortgage industry that have beendriving up borrowing costs.
The municipal bond market has been squeezed by steep losses amongbond insurance firms. Towns and cities with poorer credit ratings oftenrely on these insurers to back their bonds, enabling them to pay lowerinterest rates. But now bond insurers are facing massive write-downsbecause they promised to cover losses in the mortgage industry, leadingsome to stop insuring new projects.
"It's opening a lot of eyes that not only the big banks were gettingoverextended in these mortgage markets segments. Bond insurers wereright there with them," said Robert Nelson, managing analyst at Thomson Financial.
Some bond insurers are running out of money. A few are in danger ofhaving their credit downgraded, which could cripple their business. Thestock prices of most of the companies, including MBIA and Ambac Financial, have plummeted in recent weeks.
Without insurers helping them, lower-rated municipalities face evenhigher interest rates. It's a double whammy for them because inaddition to higher borrowing costs, many municipalities areexperiencing declines in tax revenue as real estate values fall.
The turmoil is emblematic of how the credit mess is spreading acrossWall Street in unpredictable ways. If it continues to roil municipalbond markets for a sustained time, it could pull airport users, cityresidents and even sports fans into the pain. Many towns and cities arealready facing higher borrowing costs; further problems in the bondmarket could cause hospitals to put off constructing new wings and makesome transportation projects more expensive to finance.
Maryland and Virginia have the highest credit rating possible, "AAA," and have been largely unaffected by the bond market's problems.
The District, which is rated "A," typically relies on insurers toissue bonds. It would likely have to pay a higher interest rate when itissues its $350 million in general obligation bonds in December, debtmarket analysts said. That money would pay for renovations atBrightwood Elementary School, Hardy Middle School and Cardozo HighSchool; rebuilding of the 11th Street and Sousa bridges; andimprovements to the Woodrow Wilson High School indoor swimming pool,and Roper/Deanwood Recreation Center.
The $355 million bond the District issued last year for the new Washington Nationalsstadium dropped in value this month on the secondary markets, wheremunicipal bonds, after they are issued, are traded on exchanges likestocks. That drop was a sign that investors are shunning debtinstruments they consider risky.
The District escaped the market pain on its stadium bonds because itlocked in a low interest rate when they were originally issued. Therecent performance of those bonds is a bad sign, though, for othercities that want to finance stadiums through the debt markets.
Some municipalities are putting off bonds altogether. Miami-DadeCounty had planned a massive bond, backed by airport revenue, thatwould have financed capital improvements to Miami-Dade airport. Theproject was given an A-minus rating, which is at the low end ofinvestment grade bonds. The county sought the help of a AAA-rated bondinsurer. But the interest rate still wound up being much higher thanthe county wanted to pay.
"Unfortunately, when we went to market, the market was very volatileand we were not able to achieve the savings that we needed," saidRachel E. Baum, finance director for Miami-Dade County. "That's one ofthe reasons why we pulled it. We were disappointed. . . . It isunusual."
The municipal bond market problems have not yet reached a critical stage, said Stanley Milesky, Baltimore's chief of treasury management. Compared with the 1990s, interest rates are still at a low level.
And the municipal market for all of 2007 will likely break recordsfor total volume of long-term bonds issued, largely because themunicipal bond market was roaring for the first nine months of theyear; the slump started in late October. Through the end of September,states and municipal issuers sold $324 billion in bonds this year, up22 percent over the same period last year, the Securities Industry and Financial Markets Association said.
The trouble, Milesky said, is occurring more at the fringes of the bond market, but "it could catch people unaware."
Other municipal finance directors and analysts said they areincreasingly concerned that the credit mess will lead to a broaderslowdown.
"When access to credit is being restricted to a municipality thatborrows money, there are trickle-down effects throughout the economy,"said Nelson, the Thomson Financial analyst. "It's tough to tell howthis will work itself out. I don't think anybody has a really goodanswer. For many it's a wait-and-see mindset."
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