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Saturday, February 16, 2008

Has Portland's credit card expired?

As noted here yesterday, the City of Portland says it's going to sell hundreds of millions of dollars in bonds over the next few months. Good thing it wasn't trying to do it this week. Given the crisis with the bond insurance companies, on which the city routinely relies, much of the muni bond market has ground to a halt:

Already, issuers are facing sharply higher costs because of the fallout from the credit crunch. So-called "auction-rate securities," long-term bonds sold at auction frequently to set interest rates, are reeling from the crisis. At the Thursday hearing, Gov. Spitzer said a failed auction for the Port Authority of New York and New Jersey means that agency is now paying 20% on bonds, where it used to pay 4%.
As the Times puts it this morning:
In the past week, hundreds of routine Wall Street auctions failed to attract enough buyers for debt securities issued by states, hospitals, cultural institutions, student loan authorities and port authorities, among them the Port Authority of New York and New Jersey.
It sure looks like the boys at City Hall are whistling past the graveyard these days. A lot of the debt that Portland already has out there has oddball payment schedules and fat balloon payments that are going to need to be refinanced, come hell or high water. If the muni bond market doesn't get bailed out, things could get awfully pricey.

Comments (12)

"Gov. Spitzer said a failed auction for the Port Authority of New York and New Jersey means that agency is now paying 20% on bonds, where it used to pay 4%."
Will those bonds become another Whoops?
There was an axiom that you only buy bonds that have 3 elements. Taxing ability, Insured, and I forget the other element.
Last night Moyer's program had 2 guru's that said the US is going into the tank with 10 Trillion dollar debt. Seems the tax breaks are coming home to roost. The rich got richer and the country in going down the toilet. If the country is bankrupt are the rich now poor? Now that would be sweet justice.


Get a grip bro.

PS. I love this blog.

I'm hearing on Bloomberg radio a municipality is probably better off issuing new bonds without any insurance (no rating) than with insurance (rating). If you can show the revenue stream like a bond measure approval, then you shouldn't have a whole lot of problem selling Muni's at less than 5.5%, 20 year term. The 20% Spitzer is citing may be during the time the bonds are being restructured, dropping insurance coverage, with brokers for re-issue. Not really sure but I hear most junk bonds have yields much lower than 20%. Preferred major bank shares are yielding around 7.5 to 8.5%, and these have no maturity dates but do have call dates exerciseable by bank issuer.

None of this, of course, will slow down the rush to get some state bonds issued ASAP so Phil Knight and friends can have their fabulous new basketball crib in Eugene.

You should be at least curious as to whether or not any of the boys at City Hall even paying attention to any of this.
I'll bet not a one of them has any interest in or knowledge of any of the City's debt structure. They likely dismiss it as someone else's job as they recklessly fail to fulfill their fiduciary responsibilities.

And as they and we all know none of them are ever held accountable for anything.

So,,, Party on dudes!

And Keep Portland Stupid

"[. . . ] sensitivity to changes in credit ratings (which extends to the monoline insurers, whose own ratings determine the degree to which investors and issuers are willing to rely on them) is perhaps nowhere more pronounced than in the municipal securities market. In the municipal market, the lack of uniform, timely, and robust disclosure can leave investors with little more than a credit rating to rely on when making an investment decision."
(Christopher Cox to congress, February 14) Source: Securities Law Prof Blog

"the power of credit ratings to move markets, and their potential to create cascading effects in those markets"

I suppose that could be interpreted to mean that the sky can fall, especially after a period of time when the only limit had been the sky itself.

And yet the Financial Guaranty Insurance Co. is splitting into two companies in order to separate it's "safe" muni bond insurance from it's riskier commercial side. Regulators expect other muni bond insurers to folow suit. Source Associated Press.

Basically the muni bonds are "in trouble" only because investors worry that the subprime loans are going to sink the muni bond insurers. If you separate out the muni's on their own no one is worried.

Now once again this has nothing to do with whether or not the COP's bonds are any good or not. Or if the COP has taken on too much debt. Personally I haven't a clue. Well ok thanks to Jack I have a clue I am just not an expert.

Greg C

Gosh I just reread my last two sentences and wondered wouldn't it be refreshing if more posters registered their real level of expertise after posting their opinions..... Nah never happen.

whether or not the COP's bonds are any good or not

For someone who lives here, that's not really the point. Even if the bonds are "good," what kind of city will this be when it's strapped to pay debt service for the frills of what will then be the past?

I have a clue

The finance boys at City Hall would much rather you didn't.

Get a grip bro.

I am not your "bro."

I'm hearing on Bloomberg radio a municipality is probably better off issuing new bonds without any insurance (no rating) than with insurance (rating).

It would be interesting to see Portland try to do that with all three bond issues on the current schedule. I think then we'd see what Portland's true credit rating is these days.

most junk bonds have yields much lower than 20%

The New York Port Authority isn't going to pay 20 percent for long. I am sure that is just a temporary penalty rate because its auction failed.

If you separate out the muni's on their own no one is worried.

Even if that's true, no one has figured out how to do that yet.

This has less to do with the monoline insurer's credit ratings, and more to do with investor psychology.

Most of the investors who buy auction rate securities (ARS) don't plan on holding them more than a few months, and believe (rightly or wrongly) they can be redeemed every 7 to 35 days. Given the current market dislocation (for the first time in 20 years, "AAA" rated securities are suspect, irrespective of the issuer's ability to service the debt), the safest course of action is to sell your ARS, and hold more cash.

As the pool of buyers got smaller, they demanded a higher yield. Selling begets more selling, and (in a "fast") illiquid market, even many value chasers are scared away.

Issuers and investors begin to reread their prospectus and don't always like what they learn, and the traditional buyers of last resort step away for fear that a cascade of rating agency downgrades are just around the corner (maybe somebody knows something we don't know, and that's why these many auctions are failing).

The perceived "fixed par" value causes the auction to "fail": because even a significant yield premium is inadequate compensation when the yield resets weekly, and your maturity is unknown.

The illiquidity is exacerbated because traditional buyers of longer dated bonds are unlikely to pay par value for a bond with weekly yield resets. They are unwilling to buy a long bond with something less than long bond yields and liquidity. When they do take on those kind of risks, they are used to paying a discount to par value (ARS, like money market funds, are "supposed" to trade for par value).

In summary, the short term buyers are scared, the long term buyers aren't adequately compensated for the risk they are taking, and the market makers don't want to add to their inventory.

A few possible solutions:

1. A cooridnated effort to buy everything in sight, thereby soaking up the excess supply of sellers.

2. A buyer of last resort guarantees liquidity (Federal Reserve or Treasury) which would allow the market makers to increase their inventory).

3. The myriad issuers of the ARS go out and issue new fixed rate debt to refund/replace their ARS securities.

4. The buyer's strike ends as soon as the credit ratings are affirmed at AAA (seems the least likely outcome, as the twice burned rule kicks in).

It does matter to COP, because it is a crisis of confidence in the ratings and insurance business by buyers. COP has repeated like a mantra that our high bond ratings prove that our highest paid bureaucrats are really doing everything right, regardless of appearances. But now, having been burned by AAA rated sub-prime derivatives that went bad, buyers are reasonably skeptical of all high-rated debt.

What Warren Buffet did was exactly what somebody above suggests -- buy up a big swath of surplus munis, in order to support the price.

Somebody just shared this link with me. It points to "The Big Picture" blog, which shares a nice wry outlook with Jack. It's got a Google slideshow of a viral Wall Street Powerpoint that explains the whole subprime to general bond market confidence failure in unvarnished language.


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