First Buffett Backing Since ’09 Sells Riskiest Debt: Muni CreditDarrell Preston
Warren Buffett’s first repayment guarantee on a municipal bond since 2009 showed that the billionaire’s imprimatur can help sell even the riskiest debt to investors hungry for income with yields at a generational low.
A local development agency sold $106.9 million of taxable securities yesterday for The Colony, a city north of Dallas. Proceeds will finance construction of a Nebraska Furniture Mart that the company says will be the nation’s largest home furnishings store. The venue, anchoring a $1.5 billion retail development, will be the third for the chain, owned by Buffett’s Berkshire Hathaway Inc.
“Everyone came to Warren’s party,” said Patrick Morrissey, who helps oversee about $3 billion in fixed income at Great Lakes Advisors in Chicago and said he placed an order for some debt. “Here was a name that was new to the market, and a chance to grab a little extra yield.”
The debt is backed by Berkshire Hathaway Assurance Corp., which last insured a new muni sale in 2009. The offer is called “speculative” in bond documents because it depends on tax revenue from the project, which isn’t slated to open until 2015. Still, with Buffett’s company involved and muni yields close to four-decade lows, the securities drew enough bidders that underwriters lowered yields 0.05 percentage point from initial levels, Morrissey said.
By buying these so-called dirt bonds, which are sold for real estate developments, investors are wagering on Texas’s improving finances and a strengthening national economy. An oil and natural-gas boom in Texas is helping the largest U.S. energy producer pile up a record $11.8 billion in reserves.
The development includes the 1.86 million-square-foot Nebraska Furniture Mart of Texas and a distribution center, encompassing the equivalent of 40 football fields. Plans call for expanding the site, called Grandscape, with more stores, restaurants, entertainment venues and a hotel.
The tendency for default among land-secured debt highlights the risk in the segment. Defaults in such bonds made up about half of all cases in the 12 months through January, according to data from Municipal Market Advisors in Concord, Massachusetts.
Investors were compensated as a consequence. Insured bonds maturing in 2047 priced at yields about 1.70 percentage points over benchmark Treasuries, data compiled by Bloomberg show. That compares with a yield spread of about 1.40 percentage points on average for corporate debt with a AA rating and due in more than 15 years, according to Bank of America Merrill Lynch data.
Omaha, Nebraska-based Berkshire sold $2.6 billion of securities last month, including a 30-year segment that traded yesterday at about 1.30 percentage points over Treasuries, data compiled by Bloomberg show.
“Investors expect significant yields,” said Chris Mier, managing director with Loop Capital Markets in Chicago, in an interview before the sale. “It’s got raw land development, so it’s got to work or you’re not going to get paid.”
Additional segments of bonds are being offered by entities tied to The Colony, with about 38,000 residents 27 miles (43 kilometers) north of Dallas. The store is expected to create 2,000 jobs. Over 40 years, the project will also generate $9.5 billion of new state and local tax revenue, according to a feasibility study included in bond documents.
The unrated, uninsured portion sold at yields higher than the insured part. October 2028 bonds without insurance priced at about 7 percent, compared with 3.87 percent for insured securities.
“We worked this deal extensively,” said Mark Curran, a managing director with Minneapolis-based Piper Jaffray Cos., the lead underwriter. “I won’t say it was an easy sale. It was a challenge to get the story out there. But in the end it was fully subscribed.”
The dearth of Berkshire-backed deals lured investors to the insured part, said Yaffa Rattner, head of muni research in New York at Piper Jaffray. The unrated debt also had an appeal because of the affiliation with Buffett’s company and the relatively high yields, she said.
The city isn’t directly issuing or backing the debt but agreeing to let tax revenue from the development repay bondholders. The debt is being sold through issuers affiliated with the city.
Joe McCourry, mayor of The Colony, didn’t return phone calls or an e-mail seeking comment.
The furnishings seller is investing about $250 million, according to bond documents. That and Berkshire Hathaway’s insurance should give investors confidence, said Jeff Lind, chief strategy and development officer for Nebraska Furniture Mart, in a phone interview. The store, expected to generate annual revenue of about $600 million and lure 8 million visitors, fit with the company’s effort to expand by controlling the surrounding development, said Lind.
“It’s not something we’re going to invest in and walk away from,” said Lind. “It’s not a real-estate play for us. We’re going to be there for the long haul.”
Lind declined to comment on whether Berkshire will take on any other new muni-bond insurance. Buffett didn’t respond to a request for comment sent to an assistant.
Buffett’s insurer entered the muni market in 2007 as companies such as Ambac Financial Group and MBIA Inc. were cutting back amid rating cuts tied to sub-prime mortgage business. His company then backed out as local finances deteriorated.
The decision to re-enter the market with a dirt bond surprised Richard Larkin, a senior vice president with Herbert J. Sims & Co. in Iselin, New Jersey.
The company could have “made money hand over fist” if it hadn’t abandoned the industry in 2009, he said. Only one other insurer, Assured Guaranty Ltd., remained in a market where half of new bonds had once been insured.