Jefferson County Makes Alabamians Suffer Cost Boost: Muni Credit
Cities and towns in Alabama are paying a penalty six months after Jefferson County filed the nation’s biggest municipal bankruptcy.
Investors demanding extra yield to buy the region’s debt blame elected officials, especially lawmakers in the Legislature who have failed to help the county come up with new revenue to maintain services for its 660,000 residents. Jefferson officials have fired hundreds of workers and consolidated offices, lengthening lines for chores such as renewing drivers’ licenses.
Issuers in or near Jefferson County may pay an extra 0.10 percentage point to borrow, said Mike Dunn, managing director in Montgomery, Alabama, at Merchant Capital LLC, which underwrites the most Alabama debt, data compiled by Bloomberg show. Tom Barnett, finance director of Birmingham, the county seat, said the premium may be 0.25 percentage point across the state.
“I’m reluctant to buy bonds in Alabama if the Legislature can’t craft a meaningful tax that’s constitutional,” said Tom Dalpiaz, who oversees $300 million in municipal bonds at Monument, Colorado-based Advisors Asset Management Inc. “There are 49 other states to find bonds.”
Alabama issuers’ increased costs highlight the risk from bankruptcy as municipalities contend with fiscal strains from the 18-month recession that ended almost three years ago. There were 13 such filings in 2011, the most since 1994, according to James Spiotto, a lawyer at Chapman & Cutler LLP in Chicago. They remain rare on a longer horizon: There have been 636 since 1937.
Elevated borrowing costs can add up for Alabama localities, whose average deal in 2012 is about $16 million, data compiled by Bloomberg show.
For a 30-year issue of that size paying a 3 percent coupon, a 0.1 percentage point increase would require an extra $317,000 in debt service, according to Alan Schankel, a managing director at Janney Montgomery Scott LLC in Philadelphia.
That could buy 115 school buses seating about 7,500 students, according to GovDeals.com, which sells surplus equipment.
“The areas in Jefferson County or the areas that might be affected by the Jefferson County bankruptcy have seen their spreads widen because there’s always that fear,” said William Ahern, who runs the Eaton Vance Alabama Municipal Income Fund (ETALX) and manages $3.4 billion in total from Boston. “All else being the same, you’d rather have a bond that’s outside the area.”
The county filed for bankruptcy protection on Nov. 9 after almost reaching a deal with creditors that would have cut more than $1 billion from its $3.1 billion sewer debt. It entered Chapter 9 instead after the Legislature and Alabama Governor Robert Bentley failed to bridge the loss of $70 million of annual wage-tax revenue.
A bill that would allow the county to raise taxes passed the state Senate last week and is in the House. The Legislature has four days left in its session and county officials are considering additional budget cuts in anticipation the chamber won’t act. The revenue shortfall led the county to miss a $15 million bond payment due last month. Jefferson has fired 800 workers in the past year, almost a quarter of the workforce.
Birmingham’s water works board was among issuers paying extra in the wake of the filing.
It sold about $52 million in tax-exempt bonds in March, with a 10-year portion yielding 2.84 percent, data compiled by Bloomberg show. That was 0.53 percentage point more than similarly rated utility revenue bonds, according to a Bloomberg Fair Value index. The board sold tax-free bonds in November 2010, with 10-year debt yielding 0.29 percentage point above the utility index.
“We have overcome any negative outlook that those out in the market may have related to the Jefferson County sewer situation,” Michael Johnson, the board’s assistant general manager for finance and administration, said in an interview. “Of course, some of that you can’t overcome.”
Jefferson County “remains unique in its underlying causes,” Jeremy King, a spokesman for the governor, said in an e-mail. “We do not believe those factors reflect on the state as a whole or on other municipalities or state authorities.”
Huntsville, Alabama, about 100 miles (161 kilometers) north of Birmingham and carrying a top credit grade, also paid a price. The city is home to NASA’s Marshall Space Flight Center.
The city sold bonds April 20 with a 10-year segment priced to yield 2.22 percent, or 0.16 percentage point above AAA general obligations, Bloomberg data show. In November, two days before the county’s filing, the city sold 10-year debt 0.04 percentage point above top-grade securities.
Huntsville, with a fiscal year 2012 budget of about $229 million, would have saved $61,980 in interest costs on last month’s 10-year bonds if they were priced at the same spread over AAA securities as the November debt, according to data compiled by Bloomberg.
“There are some institutional buyers that are staying out of Alabama right now,” said Phil Dotts, a managing director at PFM Group in Huntsville, who serves as financial adviser for the city. “We have not seen that, at least not as it relates to Huntsville.”
Some municipalities have avoided the public market. Birmingham privately placed $64 million of debt for a baseball stadium in December because it “couldn’t take the chance” of losing market access, Barnett said.
Declining local-government interest rates have helped municipalities, including Alabama’s. In trading yesterday, 30-year AAA debt yields fell to 3.58 percent, 0.05 percentage point above a record low set in February, according to a Bloomberg Fair Value index that started in 1991.
The state’s issuers sold $1.2 billion in munis this year, up from $545 million in the same period last year, data compiled by Bloomberg show.
Much of the issuance is for refinancing, meaning investors have fewer new bonds to buy, said Eaton Vance’s Ahern. That spurs demand for riskier credits.
“In a more normal market, we might see a wider spread penalty, or even some issuers losing market access,” said Matt Fabian, a managing director at Concord, Massachusetts-based Municipal Market Advisors. “People are generally more concerned about Alabama issuers, but this kind of environment smoothes over a lot of those concerns.”
Following are pending deals:
ARIZONA SPORTS AND TOURISM AUTHORITY plans to sell $177.6 million of revenue bonds as soon as tomorrow. Proceeds will refinance debt sold to help construct the University of Phoenix Stadium. RBC Capital Markets is the underwriter. (Added May 8)
COLUMBIA UNIVERSITY in New York City plans to issue $100 million of taxable bonds as soon as this week to finance capital projects and refund debt, according to sale documents. The longest maturity for the bonds is 2042. JPMorgan Chase & Co. (JPM) is the underwriter. Standard & Poor’s rates the bonds AAA. (Added May 7)
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