Local Government and Banking & Finance and Bonds and Government & Economic Development and Government

Issuers of bonds burned by rate hike

June 29, 2013

If you’ve ever seen gas prices spike after filling your tank, you can appreciate the sense of relief at the Indianapolis Airport Authority, which recently closed a bond refinancing that provided $26 million in savings.

On June 19, eight days after the airport completed its deal, the benchmark 10-year Treasury yield jumped to 2.33 percent, its highest level since August 2011, and bond traders began a sell-off that lasted through June 24. Municipal bond issuers across the country, including the Indianapolis Bond Bank, canceled sales because of market conditions.

bonds-chart.gif“I would almost guarantee you that we would see a much higher rate if we looked for buyers today,” airport Treasurer Jerry Wise said. The airport was paying 4.7 percent on $37.8 million in bonds maturing in five years and now will pay 1.68 percent.

The $26 million savings are important to the airport, where annual debt payments slightly exceed the $64 million operating budget. Most of the debt is the result of the $350 million terminal opened in 2008.

Government entities across Indiana have spent the past two years refinancing every possible bond to take advantage of historically low rates, but the savings might not be so easy to come by if rates continue to rise.

Bond issuers generally need a full percentage point of savings to make the cost of refinancing worthwhile, and most of the bonds that Indiana governments are working with have rates ranging from 4.5 percent to 6 percent, said Jim Merten, vice chairman of the board at Indianapolis-based underwriter City Securities.

The 10-year Treasury yield was at 2.55 percent on June 25, and Merten thinks rates will continue rising because Federal Reserve Chairman Ben Bernanke indicated on June 19 that the Fed could start later this year winding down the bond-buying program that’s kept rates low.

“I’m not sure they’re done moving up because I think we’ve got a fundamental change at the Fed,” Merton said.

The potential for savings also depends on the bond’s maturity date and several factors besides interest rates, said Gerald Malone, executive partner at Umbaugh, an Indianapolis-based public finance consultant.

But rates are a big component, Malone said. “If rates continue to go up, it will become less and less likely that they will be able to refinance their debt at levels that would offset any cost and produce a realistic amount of savings.”

Because of the sell-off, the Indianapolis Bond Bank decided not to go to market the week of June 24 with its $38.3 million package, which was originally issued in 2006 at 5 percent for storm water utility improvements.

The bond bank also anticipates refinancing a $15.2 million package, currently at 5.25 percent, sometime in July.

Kintner Indianapolis Bond Bank Director Deron Kintner said refinancing will proceed.

Bond Bank Director Deron Kintner thinks the city will complete those deals.

“It is still very possible to refund debt in this environment and have savings,” he said. “Are the savings less than what they were a week ago? Yes.

“We’re still lower than the historical average on interest rates,” he added.

Indeed, the 10-year Treasury yield has stayed below 4 percent since late July 2008, a level not seen in four decades.

Local governments have a slew of new bond issues in the works.

Hamilton Southeastern voters in May OK’d borrowing $95 million to expand two high schools in 2015. The school corporation won’t need all that cash for another 18 months to two years, but Chief Financial Officer Mike Reuter said he might reconsider his borrowing strategy in the meantime in light of the interest rate trend.

For several years, Hamilton Southeastern has issued a series of bond-anticipation notes, which are good for six months and cost less than 1 percent, to cover costs during construction, Reuter said. If long-term interest rates continue rising, it might make sense to go ahead with the bond issue sooner.

“Right now, we’re sticking with our original plans,” he said.

The Indianapolis City-County Council soon will be asked to approve a $33.5 million bond issue for relocating and building a new fire headquarters and station, plus subsidizing redevelopment of the old location on Massachusetts Avenue, Kintner said.

That could come before the council as soon as August, he said, but that’s too far in the future to predict how the bond market could affect total costs or borrowing strategy.

The town of Fishers recently issued $11 million in general-obligation bonds at 3.5 percent for its share of a new I-69 interchange at 106th Street, plus other roadwork.

Fishers might not land as favorable a rate later this summer, when it goes to market with $14 million for a large mixed-use development with apartment builder Flaherty & Collins.

Town Manager Scott Fadness said he hopes Fishers’ AA-plus credit rating will help.

“On the macro level, there’s not much we can do about the overall interest-rate trend,” he said.

Considering rates are still near historic lows, Fadness said, “I wouldn’t look at the interest rates today and say this is prohibitive to our ability to issue debt.”•

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