Nashville Borrowing $575 Million After Record Floods Raise Downgrade Risk
Nashville and Davidson County, Tennessee, home of country music’s Grand Ole Opry, is selling $575 million in bonds two weeks after being warned of a possible credit downgrade after the worst flood in a half-century.
More than a foot of rain (30 centimeters) in 48 hours sent the Cumberland River surging over its banks in early May, killing at least 11 people. Private-property damage exceeded $1.5 billion, the joint city-county Metropolitan Government said.
The storm may have cost the city and county $20 million in lost property-tax revenue alone, adding stress on a government with already-low general-fund reserves, Moody’s Investors Service analysts Christopher Coviello and Geordie Thompson said in a report. Moody’s, which announced a credit watch May 19, rates the issue Aa1, its second-highest and one step above Standard & Poor’s AA.
“It’s something we’re cognizant of in this deal,” Gary Gildersleeve, a partner and municipal manager at New York-based Evercore Wealth Management, said of the flood’s effects. “It’s not a high-tax state like California, New York and New Jersey are, so there’s not quite the same demand.”
Tennessee’s individual income-tax rate was 6 percent as of Feb. 1, compared with a top rate of 10.55 percent in California and 8.97 percent in New York and New Jersey, according to the Tax Foundation.
For all U.S. issuers of fixed-rate debt, the total visible supply for the next 30 days rose to $9.68 billion today, according to data compiled by Bloomberg. Total scheduled issuance this week, shortened by a holiday on May 31, is $4.7 billion, the lowest since the week ended April 9, according to Bloomberg data. About $9.7 billion in municipal debt was sold the week ended May 21.
Issuers “will benefit with the lighter calendar,” said Gildersleeve, who helps oversee $1.7 billion in assets. Tax- exempt demand may get a boost from municipal-debt holders reinvesting principal and interest payments in June and July, he said.
“There is a focus on expectations for the June and July reinvestment, which appears to be greater than the current supply, and it will have an effect,” Gildersleeve said.
Reinvestment demand is expected to top $100 billion, Alan Schankel, a managing director at Philadelphia-based Janney Montgomery Scott, said in a report yesterday.
Nashville’s offering consists of $250 million in taxable Build America Bonds to fund capital projects, $275 million of tax-exempt obligations and $50 million in taxable bonds to retire and refinance debt, preliminary-offering documents show. The securities will be marketed by a group led by Goldman Sachs Group Inc.
Five- and 10-year bonds were priced to yield about 25 basis points above AAA debt of the same maturity in orders placed yesterday by private investors, said Dexter Torres, head trader for fixed-income manager Samson Capital Advisors in New York. A basis point is 0.01 percentage point.
The Build America Bonds are only being offered today to institutions, Richard Riebeling, the Nashville-Davidson County finance director, said in an e-mail. Institutional investors are often mutual funds and insurance companies.
Average yields on Build America Bonds rose about 5 basis points yesterday to 5.89 percent, the fifth increase in seven days, according to a Wells Fargo index. The securities, whose borrowing costs are eligible for a 35 percent federal subsidy, are the fastest-growing segment of the $2.8 trillion municipal market.
Top-rated, 10-year tax-exempts were unchanged yesterday at 3.12 percent, up 3 basis points from a nine-week low of 3.09 percent on May 26, according to a daily survey by Concord, Massachusetts-based Municipal Market Advisors.
Nashville’s bonds are backed by property-tax revenue and also carry a pledge of the county’s full faith and credit, the offering documents show.
The city’s property-tax revenue rose almost 2 percent in fiscal 2009 from the previous year, even as total revenue fell more than 3 percent, according to Bloomberg data. The county has had an operating surplus for five straight years, Bloomberg data show.
The county last came to market with a competitive sale of $308 million in tax-exempt obligations in March 2008. Bonds maturing in 2018 were priced to yield 4.06 percent, 8 basis points higher than top-rated 10-year general obligations at the time, according to Municipal Market Advisors data.
The securities traded April 5 at an average yield of 2.98 percent, according to Municipal Securities Rulemaking Board data, 11 basis points above an 8-year MMA index.
Following are descriptions of pending sales of municipal debt in the U.S.:
COOK COUNTY, Illinois, which includes Chicago, the third- largest city in the U.S. by population, plans to sell $1.05 billion in general-obligation bonds backed by property taxes as soon as next week, according to preliminary offering documents. The offering will be split, with $400 million of tax-exempt refunding bonds, $331.9 million of Build America Bonds and $322.3 million in taxable securities. Chicago-based Loop Capital Markets LLC will lead the group marketing the securities. (Added June 3)
MONTGOMERY COUNTY in Pennsylvania, home of Bryn Mawr College outside Philadelphia, plans to sell $313.8 million in tax-exempt mortgage revenue bonds through its Industrial Development Authority today. The sale will finance building a hospital on a former golf course. The securities, marketed by Goldman Sachs, will mature serially from 2013 through 2020 and in 2025, 2030 and 2038. (Updated June 3)
ARIZONA plans to sell $300 million of tax-exempt securities as soon as next week through investment banks led by Morgan Stanley to generate operating cash. The debt will be secured by lease payments subject to legislative appropriation for prisons, state office buildings and other facilities that are being sold to investors in a so-called leaseback deal. The debt, known as certificates of participation, will be insured by Assured Guaranty Municipal Corp., a unit of Bermuda-based Assured Guaranty Ltd. The debt carries underlying ratings of Aa3 from Moody’s and A+ from S&P, fourth- and fifth-highest, respectively. (Updated June 3)
ILLINOIS, the lowest-rated U.S. state after California, plans to offer $500 million in tax-exempt refunding bonds as early as June 14. The securities, backed by the state’s 80 percent portion of sales tax revenue, will go toward refunding Build Illinois Bonds. Chicago-based Cabrera Capital Markets LLC will lead the group marketing the debt. (Added June 1)