Swaps Live On as Battery Park Retires Auction Debt: Muni Credit
The agency that runs Battery Park City, the Manhattan neighborhood that houses Goldman Sachs Group Inc. (GS)’s headquarters, is borrowing almost $1 billion in part to refinance auction-rate debt, five years after the $330 billion market collapsed.
As much as $612.5 million of next week’s bond sale will go toward retiring the securities, issued a decade ago. Weekly auctions to reset interest rates on the bonds have failed since the financial crisis in 2008, and the authority says the deal will allow it to lower borrowing costs.
The savings will bolster the agency as bets mount that an expanding U.S. economy will eventually lift interest rates. Battery Park City also faces growing competition for office space, including from the nearby World Trade Center site under development. Fitch Ratings cited the alternatives as a risk when it cut the outlook on the authority’s AAA grade to negative this month.
“We’ve been enjoying a very low cost of capital,” said Matthew Monahan, a spokesman for the authority, which manages a 92-acre (37-hectare) parcel in Lower Manhattan that is home to 17,000 people. “There’s concern going into the future that interest rates might rise.”
Investors in the $3.7 trillion municipal market have joined other fixed-income buyers in gauging when the Federal Reserve will lift its benchmark interest rate from near zero, where it’s been since 2008. Fed Chairman Ben S. Bernanke last month surprised financial markets by maintaining the bank’s pace of bond buying, fueling the biggest muni rally since 2011.
Battery Park City will keep interest-rate swaps that were part of its 2003 deal and run through 2033, Monahan said. The agency, established in 1968, was among dozens of localities and school districts that bought the unregulated derivatives from Wall Street banks.
The contracts were supposed to reduce borrowing costs on debt with variable rates and hedge against rising rates. Issuers nationwide, including Detroit’s utilities and Louisiana, have paid at least $4 billion to banks to end the agreements after interest rates fell instead.
Yields are set to rise in the next year, according to analysts surveyed by Bloomberg, including the London interbank offered rate, the benchmark for Battery Park City’s auction- and variable-rate debt. Three-month Libor may increase to 0.36 percent in a year from 0.24 percent now, according to the median forecast of 41 analysts surveyed by Bloomberg.
Libor, a measure of what banks charge to borrow from each other, is the benchmark for more than $300 trillion of securities from mortgages to student loans.
The authority has had to pay double the Libor rate for its auction-rate debt, while its new obligations would cost a premium over one-month Libor, which is now about 0.17 percent, Monahan said. The agency didn’t specify the amount of the premium.
The auction-rate market was worth $330 billion before it collapsed during the credit crisis as demand faltered and dealers stopped stepping in as buyers of last resort. Investors who held the debt were unable to sell. About $32 billion of muni auction-rate debt remains, data compiled by Bloomberg show.
A portion of the agency’s auction-rate debt maturing in November 2039 carried an interest rate of about 3 percent in January 2008, Bloomberg data show. That swelled to 5.5 percent by the following month as the auctions began to fail.
“We roughly will have the same percentage of variable to fixed rate after the refunding,” Monahan said. “We’re hedging -- we have assets that in a rising interest-rate environment will mitigate increases in variable-rate debt-service costs.”
The authority was created by the state legislature to balance commercial, residential, retail and park space in the planned community built on landfill. It is borrowing as its commercial core, the World Financial Center, is undergoing a makeover.
Brookfield Office Properties Inc. (BPO) is spending $250 million to lure tenants to the 14-acre complex on the Hudson River. About 2.7 million square feet is vacant after Bank of America Corp.’s lease expired last month, Fitch said.
The developer is transforming the former home of Merrill Lynch into a destination for technology and media companies, even as 8.7 million square feet of office space opens up at the World Trade Center site. Brookfield has signed up retailers such as Michael Kors, and eateries including Umami Burger and Parm.
Fitch said the diversification away from financial services reinforced the agency’s AAA grade. Tenants in the area include American Express, Oppenheimer & Co. and Royal Bank of Canada, the New York-based ratings company said. The Goldman Sachs Tower is at 200 West Street.
“It’s very valuable real-estate, and now it’s a good mix of real-estate,” said Howard Cure, director of muni research in New York at Evercore Wealth Management, which oversees $4.7 billion, including the authority’s debt.
Kathy Bramlage, a director at HighTower Advisors’ Treasury Partners Unit in New York, said she won’t buy the Battery Park bonds. She said yields will be too low and she expects interest rates to rise. Benchmark 10-year munis yield about 2.71 percent, close to the lowest since June.
“A triple-A Battery Park, who’s going to get excited about it?” Bramlage said.
Other investors have been purchasing. Some Battery Park City Build America Bonds callable in November 2019 were valued at a yield 2.89 percentage points more than Treasuries last week, BVAL data show. That was the smallest penalty since July.
The variable-rate debt will be sold privately to three banks, said Monahan, who declined to name them. About $373 million of fixed-rate bonds will be offered publicly as soon as Oct. 15, Fitch said.
Bramlage said demand may come from New York tax-exempt mutual funds which will be able to diversify their porfolios with an issuer that doesn’t come to market frequently. It will be the authority’s first deal since 2009, Bloomberg data show.
She said the offer may also get interest from individual investors who will focus on the top ratings.
Proceeds will refund debt, help build a bridge and restore a pier and the Esplanade along the Hudson River.
“It’s always been fairly convenient for people to work there, and it’s becoming more desirable residentially,” Cure said. “This will get a lot of attention. I would expect them to do well.”
The ratio of the yields, a gauge of relative value, is about 103 percent, compared with an average of 93 percent since 2001. The higher the figure, the cheaper munis are compared with federal securities.
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