Fairfax Debt Gains Most in Two Months as Cuts Loom: Muni Credit
Debt of Fairfax County, Virginia, home to defense contractors such as General Dynamics Corp. (GD), is the strongest in two months even as it faces losing its top credit rating within weeks as federal spending cuts loom.
The county with the nation’s second-highest median household income is offering its biggest competitive bond sale since 2009 this week, data compiled by Bloomberg show. The $318 million issue comes two months before automatic federal budget reductions nationwide that could hurt the economy in Fairfax, which also hosts contractors Northrop Grumman Corp. (NOC) and Booz Allen Hamilton Holding Corp. (BAH)
The corporate presence makes Fairfax one of 36 localities, all with the highest ratings, that Moody’s Investors Service said it would downgrade along with the U.S. if lawmakers can’t agree on deficit-reduction measures. Yet investors are still buying debt of the county, which had its biggest revenue growth since 2008 and set aside $8 million to offset potential federal cutbacks. Holders are demanding the least extra yield in two months, according to Bloomberg data.
“Local-government officials in Virginia have been prudent in how they manage their budgets, and I don’t see that changing anytime soon,” said John Bonnell, who oversees USAA Investment Management Co.’s Virginia Bond Fund (USVAX), which beat 89 percent of its peers in the past year.
Bonnell, who’s based in San Antonio, said the company may buy some of the general obligations Fairfax plans to issue this week.
Fairfax, which trails only neighboring Loudoun County in terms of household income, is among top-rated municipalities from Maryland to New Mexico that benefited from federal spending to counter the longest recession since the 1930s. Their credit standing is now at risk from the nation’s $16.4 trillion debt burden.
The U.S. reached its debt limit Dec. 31 and the Treasury will exhaust measures to finance the government as early as mid- February, according to the Congressional Budget Office. The Jan. 1 deal to avert more than $600 billion in federal tax increases and spending cuts didn’t provide “meaningful improvement” in the U.S. debt burden, leaving the nation’s Aaa rank at risk, Moody’s said.
The U.S. is moving to cut some $1.2 trillion of spending over the next decade. As part of last week’s deal, Congress delayed by about two months the $109 billion of reductions that were to begin this month. Half are to come from defense spending, a driver of Virginia’s economy.
“Any issuer that has a large concentration of either federal employees or governmental contractors makes them vulnerable to potential cuts,” Bonnell said. “That has been a source of stability.”
The county of about 1.1 million across the Potomac River from Washington has the highest credit grades from the three major rating companies. Fairfax has $2.2 billion of general- obligation debt, according to Moody’s.
“We have been told there’s a lot of interest in our bond sale,” said Joe LaHait, the county’s debt coordinator. “We believe we’ve got a very strong credit profile.”
In fiscal 2011, spending related to federal contracts totaled $26 billion in the county, according to bond documents. Even with a 10 percent drop from that level, the disbursement would be 40 percent higher than in 2008.
The county plans to use proceeds from the sale for schools, roads, parks and libraries, while another portion may be sold to refinance debt, depending on the level of interest rates.
Even with the potential reductions, the extra yield on Fairfax bonds probably won’t rise from past sales, said Linda Murphy, a muni analyst at T. Rowe Price Group Inc. in Baltimore.
The company, whose Virginia Tax-Free Bond Fund (PRVAX) has about $1 billion in assets, may buy bonds from this week’s sale and wouldn’t need a higher interest rate to do so, she said.
Fairfax general obligations maturing in April 2017 traded Jan. 3 at an average yield of 0.88 percent, data compiled by Bloomberg show. The interest rate was 0.11 percentage point higher than benchmark AAAs, the narrowest spread in two months, Bloomberg Valuation data show.
Investor confidence in Fairfax comes in part from its wealth, Murphy said. The county had a median household income of about $106,000 in 2011, double the national average, U.S. Census Bureau data show. The jobless rate was 3.8 percent in October, according to Bureau of Labor Statistics data, compared with 7.9 percent nationally.
Fiscally sound municipalities such as Fairfax have trailed the $3.7 trillion muni market as the lowest yields in a generation pushed investors toward riskier issuers.
Top-rated munis earned 4.4 percent in the past 12 months, about half the gain on the lowest investment-grade debt, according to Barclays Plc data.
In trading Jan. 4, the interest rate on top-rated tax- exempts due in 10 years was little changed at 1.83 percent, Bloomberg Valuation data show.
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