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Thursday, December 6, 2012

County bridge borrowing is larger than advertised

We wrote last week about the Multnomah County bonds that were being sold this week to pay the county's share of replacing the Sellwood Bridge. The official documents describing the deal said it was going to be about a $128 million loan.

The bonds sold on Tuesday, and it appears that the loan is a lot larger than that. The bonds bear interest at a rate that's far above the market, and so they sell at a premium. That's just another way of the county borrowing more than the face amount of the bonds.

By our calculations, if you take the premiums into account, the county is actually borrowing more than $149 million, not $128 million. That's about a 16.5% premium overall. Here's our math:

If we've got the numbers right, then you can just remember that when the flacks and reporters talk about a $128 million bond deal, it's really a $149 million bond deal. That's quite an IOU.

Comments (9)

I'm wondering if anyone can remember a public works project that didn't have a substantial cost over run because of a glitch in the specs. that were written by the public works agency.

I understand above, but Mult County only owes the principal at the stated interest rate.

If they offer $1M at 5% (above market) and it sells for $1.25M, they get $1.25M, but are paying off $1M at 5%.

I'd guess based on the above, why:
- Offer a lower face amount of bonds if they actually needed $128M now or
- If they only need $128M now, what are they going to do with the $21M extra?

It's a $149 million borrowing at market rates, or a $128 million borrowing at premium rates. You can write it up either way, but the premium rate way makes it look as though you're borrowing less principal than you actually are.

Time to start charging (adult) freeloader bicyclists user fees to help pay off those bonds. They have more dedicated space on the replacement Sellwood Bringe then the current motor vehicle owner payees.

Can you give your whole "freeloader bicyclist" bit a rest? It's gotten quite tiresome.

"the premium rate way makes it look as though you're borrowing less principal"

I think they're only borrowing the face amount of $128M at some rate. THat's what they owe.

The rate is premium to the market, so they can sell the bonds for higher price now and pay higher than market rates over time.

Gah! You guys lost me.

How much are we having to pay back? That's the important part, right, or am I confused?

Are we paying back 128, but actually receiving 149 and the 21 extra is just going to disappear in some sort of backroom hush hush way? Is that the issue?

Bonds are a new field for me.

The entire $149 million is paid back to lenders by a combination of the principal at maturity and above market premiums on the coupon rate. If the coupon rates had been set at market only $128 million would have been raised. Jack's analysis is spot on.

It would be like going down to the bank for a $200K mortgage. The banker says, "I'll hand you $232K right now if you'll pay me back $200K plus interest at a ridiculously high rate." You can tell your mom you only owe $200K, but it's a bit disingenuous.

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