Oyster Bay Slipping as Cash Dries Up in Mall Fight: Muni Credit

Long Island’s Oyster Bay, New York’s sixth-largest bond issuer, is trying to balance its finances after seven years of deficits. A battle between two of the biggest U.S. mall developers may wreck those plans.

The municipality, whose bond yields jumped to a two-year high last month, has budgeted $17 million from the proposed sale of a 54-acre parcel. In May, the town council approved the deal with a buyer backed by Simon Property Group Inc., the biggest U.S. mall real-estate investment trust by market value. The company is trying to prevent competitor Taubman Centers Inc. from building a mall on an adjacent site.

Taubman, in turn, is seeking to block the land sale to the Simon affiliate and filed petitions forcing an Aug. 20 referendum on the deal. If voters reject the Simon-backed plan, Oyster Bay, with a median household income almost double the state’s, may not have enough cash to pay its bills by Nov. 1, said Lindsay Wilhelm, a Standard & Poor’s analyst.

“The town fully expects the referendum to pass,” Wilhelm said by phone from New York. “If it doesn’t, it’ll go into crisis mode.”

Rough Ride

Oyster Bay, the former home of U.S. President Theodore Roosevelt about 34 miles (55 kilometers) east of New York, joined municipalities nationwide in seeing revenue trail spending obligations following the 18-month recession that ended in 2009. S&P has lowered the town’s grade five levels since 2011, to A, sixth-highest, and is threatening to do so again because of deficits exacerbated by the same rising pension obligations burdening localities from California to New York.

From 2007 to 2011, Oyster Bay’s pension and health-care obligations climbed 21 percent, according to data from state Comptroller Thomas DiNapoli. By contrast, mortgage-tax revenue fell by two-thirds, said John Venditto, supervisor of the town, whose 293,000 residents make it bigger than Buffalo, the state’s second-most-populous city.

The town spans almost 115 square miles and touches both the north and south shores of Long Island. Its 18 villages, all of which have independent governments, are still subject to the town’s property taxes. Oyster Bay’s median household income of about $107,000 from 2007 to 2011 compared with the statewide level of about $57,000.

Debt Drive

To maintain services and continue an infrastructure overhaul, Venditto increased Oyster Bay’s debt to $751 million in 2011 from $410 million in 2007, making it the state’s fifth-largest issuer other than New York City, according to DiNapoli’s data. Those spending decisions led to S&P’s rating cuts.

The company said July 25 it may lower the town’s credit grade within 90 days if voters block the property sale. Oyster Bay general-obligation bonds maturing in February 2017 traded July 31 with an average yield of 1.93 percent, close to the highest since 2011, data compiled by Bloomberg show. The extra yield investors demanded on the debt, about 0.92 percentage point, was more than double levels on some trades in May.

Venditto, who opposes the Taubman project because he doesn’t want a mall on the site, said in an interview that he has a plan to maintain cash flow if the sale to the Simon group fails, though he declined to provide details.

Investor’s Decision

Howard Cure, who heads municipal research at New York-based Evercore Wealth Management LLC, said he’s no longer buying Oyster Bay debt.

“You don’t associate multistep downgrades with a township of this size and wealth,” said Cure, whose company manages about $4.7 billion. “What gets me nervous is when you’re relying on voters to make a fiscal decision.”

In 2012, with the town’s reserves drained, Venditto, a 64-year-old Republican in charge since 1998, negotiated union concessions, cut discretionary spending and established a retirement-incentive program that he said collectively saved $26 million in a budget of about $265 million. The balancing effort is now facing pressure, according to Venditto.

“We mapped out this course for economic recovery, with a view toward avoiding cash-flow problems,” he said by phone. “That phase of recovery has become enmeshed in a battle royale between two colossal economic forces: Taubman and Simon.”

The two mall giants, both run by sons of the billionaire founders, have been squaring off in public hearings and courts for decades. The friction reached a peak in 2003, when Bloomfield Hills, Michigan-based Taubman, backed by Michigan’s governor, successfully fought off a takeover bid by Indianapolis-based Simon and Sydney-based Westfield Group.

Dueling Projects

In 1994, Taubman purchased an industrial lot in Oyster Bay with plans to build a mall. When the council approved selling public-works department property in May to Simon-backed Oyster Bay Realty LLC, Taubman said it didn’t get a chance to bid. Venditto said he was in talks with both companies, though he said selling to Oyster Bay Realty would help him achieve his goal of blocking Taubman’s project.

Taubman wants the neighboring land, because it has a better chance of clearing environmental hurdles for its mall project if it owns the parcel, which is only about 12 miles from Simon’s Roosevelt Field mall. Michael McKeon, a spokesman for Oyster Bay Realty, said the firm plans to build a mixed residential and commercial development. Venditto said the contract doesn’t require the buyer to do anything for as long as eight years.

Opportunity Knocks

Robert Taubman, chief executive officer of Taubman Centers, said in a July 26 earnings call that he has no plans to back down.

“We continue to believe, as we have for 20 years, that this is perhaps the best opportunity to build a shopping center in the United States,” Taubman said.

In the local-debt market this week, issuers including Puerto Rico’s electric utility will borrow at the lowest municipal interest rates since July 24. At 2.86 percent, yields on benchmark 10-year munis compare with 2.64 percent for similar-maturity Treasuries.

The ratio of the yields, a gauge of relative value, is about 108 percent, compared with an average of 93 percent since 2001. The greater the figure, the cheaper munis are compared with federal securities.

Before it's here, it's on the Bloomberg Terminal.