Refinancings Plummet After Worst Losses in 14 Years: Muni Credit
U.S. localities are scaling back refinancing by the most since 2006 as the worst municipal bond losses in 14 years push up borrowing costs.
With yields near a 29-month high, refinancings shriveled to just $81 billion this year through Sept. 11, out of $229 billion of total sales, Citigroup Inc. data show. That’s down 29 percent from last year’s pace, when localities refunded the most since at least 2003.
From Massachusetts to California, issuers have canceled such deals, which provide a way to save money other than firing workers or cutting services. The refinancing drought is also feeding into the bond sell-off by giving fund managers less cash with which to meet the largest wave of withdrawals since 2011, according to research firm Municipal Market Advisors.
“It would have been great to refinance more,” said Colin MacNaught, assistant treasurer of Massachusetts, which reduced a June general-obligation sale to $669 million from a planned $1.1 billion because some refunding debt didn’t save enough money.
“It’s a missed opportunity,” MacNaught said in a phone interview. The state had planned to re-offer the debt, “but rates have not declined since then,” he said. “Refunding has gone away.”
Benchmark yields have almost doubled over the past nine months as Detroit’s record bankruptcy and speculation that the Federal Reserve will curb its bond buying have led munis to outpace declines in Treasuries and corporate debt. Local debt lost 1.6 percent in August, the most for the month in 14 years, Bank of America Merrill Lynch data show.
Across the country, at least $420 million of bonds for refunding are considered day-to-day as localities wait for interest rates to steady.
About 2,000 miles (3,218 kilometers) from the U.S. auto-industry capital, the Government Development Bank for Puerto Rico last week blamed Detroit for raising borrowing costs across the market and contributing to the GDB’s decision to scale back its financing plans.
Municipalities took advantage of refinancing deals after the 18-month recession that ended in June 2009 as yields fell to the lowest in a generation. They favored such issuance to repair their budgets rather than borrowing for projects. Lower-rated localities in particular benefited from investors’ search for yield.
“The fact that a slightly weaker muni credit could go and refund its bonds and make interest savings was a plus, and now that goes away,” said Vikram Rai, a fixed-income strategist at Citigroup in New York.
Much of the refinancing spurt had been current refunding, in which older bonds are retired within 90 days after new securities are sold to replace them. That puts cash in investors’ hands while keeping total debt unchanged.
Last year, when investors poured $27.8 billion into muni mutual funds, the refunding wave depressed net supply and pushed yields to the lowest since the 1960s as money managers searched for bonds to buy with the cash wave. In 2013 the trend has reversed, with individuals pulling $22.8 billion from local debt funds through Sept. 11, Lipper US Fund Flows data show.
While less supply traditionally pushes yields lower, “this may not be the case in 2013,” according to a Sept. 9 report from Concord, Massachusetts-based MMA. “Because current refundings have little impact on net supply, a drop-off in sales does not mean fewer bonds available per investor.”
States and localities have issued about 12 percent less debt this year than at this time in 2012, when they sold about $244 billion, data compiled by Bloomberg show. Municipalities have scheduled about $5.3 billion in sales over the next 30 days, the lowest visible supply since June.
One refunding deal that was considered day-to-day last week was from the California Infrastructure and Economic Development Bank, which is planning to offer about $196 million in debt on behalf of the California Independent System Operator, which provides access to much of the state’s power grid.
“Things have dropped off over the last few months,” Ruben Rojas, the Sacramento-based development bank’s deputy executive director, said in an interview. He said the borrower made the decision to price on a day-to-day basis and didn’t say when the debt may be offered.
Even top-rated borrowers are getting squeezed. Georgia canceled a $157 million general-obligation sale in June that would have refinanced debt, and hasn’t come back to market, Bloomberg data show.
Lee McElhannon, director of bond finance at the Georgia State Financing & Investment Commission, said at the time the increase in interest rates “moved it well out of our commission-approved policy for savings.” He added that “we don’t see it coming back to us in the near future.”
As municipalities have mended their finances, they’ve started hiring again. Local-government employment rose to 14.08 million last month after falling to 14.03 million in October 2012, the lowest since June 2005, Labor Department data show. The workforce has shrunk from 14.61 million in 2008.
The higher yields may jeopardize a rebound in investment by communities. Financing for infrastructure is growing 6 percent from last year’s pace, after falling the previous two years, according to Citigroup.
“The biggest drop has been in refunding, though generally new money supply will slow down as well” as issuers adjust to higher yields, said Jamie Pagliocco, director of bond managers in Merrimack, New Hampshire, at Fidelity Investments, which oversees $28 billion in munis.
“If you’re in an environment where quite a lot of time passes by with very low issuance, then you start running the risk of infrastructure issues.”
Localities from North Carolina to Washington are set to sell $3.7 billion in long-term debt this week, the least in a non-holiday week since December.
The ratio of the yields, a gauge of relative value, is about 105 percent, compared with an average of 93 percent since 2001. The higher the figure, the cheaper munis are compared with federal securities.
Following is a pending sale:
Washington plans to sell about $295 million of federal highway grant-anticipation revenue bonds this week to help finance a $4.1 billion bridge across Lake Washington, between Seattle and Redmond. Moody’s Investors Service rates the debt Aa3, fourth-highest. Known as Garvees, for grant-anticipation revenue vehicles, the bonds are backed by federal aid.
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