Borrowings Up 73% as Low Rates Let Anyone Sell Debt: Muni Credit
Municipal-debt issuance is on a pace for a record annual increase as yields close to the lowest in a generation spur even the worst-rated states and cities to refinance borrowings.
Federal Reserve Chairman Ben S. Bernanke’s policy of keeping the benchmark overnight interest rate close to zero is helping pad the coffers of issuers whose budgets are rebounding from the recession that ended in 2009. It’s also aiding borrowers such as the Puerto Rico Public Buildings Authority and Detroit’s water and sewage agency. Both are rated near junk by Moody’s Investors Service and refunded higher-cost debt in June.
Municipalities have sold $195 billion of long-term, fixed- rate debt this year, 73 percent more than the same period in 2011, data compiled by Bloomberg show. Refinancing is helping depress yields by contributing to a historic $142 billion flowing to bondholders in the three months through July, which they can funnel back into munis, according to Citigroup Inc.
“Rates are very benign and that makes them attractive to issuers and causes a little pain for investors,” said John Hallacy, head of municipal research at Bank of America Merrill Lynch in New York. “So investors are more willing to participate earlier on if they think rates are going to drop.”
Bank of America, Janney Montgomery Scott LLC, Morgan Stanley and RBC Capital Markets LLC boosted issuance projections in the past month. At $390 billion, Bank of America’s 2012 forecast is the biggest and is up 18 percent from December. It would represent a 51 percent annual leap, the steepest since at least 2003, data compiled by Bloomberg show.
About 64 percent of this year’s sales have been for refunding, the most since 1993, according to Bank of America.
Mutual funds that invest in munis have added $16.3 billion this year, the biggest influx since 2009, according to Lipper US Fund Flows data. Demand has held up even as three California municipalities in as many weeks decided to file for bankruptcy.
“The market still doesn’t see California’s problem and some of the struggling credit situations as typical of the overall muni market,” said Richard Ciccarone, chief research officer at McDonnell Investment Management LLC in Oak Brook, Illinois, in an interview.
Yields on benchmark tax-exempt bonds approached record lows yesterday. The interest rate on 10-year munis rated AAA touched about 1.75 percent, within about 0.01 percentage point of its least ever, according to a Bloomberg Valuation index starting in January 2009. A weekly Bond Buyer gauge of 20-year yields is close to the lowest since the 1960s.
The refinancings are a boon to local governments, which saw a decrease in property taxes in the first three months of 2012 following two quarters of growth, according to the Nelson A. Rockefeller Institute of Government in Albany, New York.
Last month, the Puerto Rico agency sold about $589 million of refunding bonds, while Detroit’s independently run water and sewerage department offered about $660 million. Moody’s rated the securities from the U.S. commonwealth agency Baa1, three steps above junk. The Detroit issuer received Baa2, one level lower.
Issuers with better credit are taking advantage too. Albany, New York’s capital, generated about $927,000 in net- present-value savings from a $12.6 million refunding sale last month, according to City Treasurer Kathy Sheehan. The offer was rated AA- by Standard & Poor’s, the fourth-highest grade.
“If I were to take that total amount over a six-year period, we’re talking about being able to put more police or firefighters on the street,” she said in an interview.
Following is a pending sale:
PENNSYLVANIA plans to sell $364 million of general- obligation debt as soon as next week, according to data compiled by Bloomberg. Proceeds will refund debt. (Updated July 18)
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