Atlanta’s planned $200 million housing bond faces grim, volatile market
By David Pendered
One city government saw a five-fold hike in borrowing costs amid the coronavirus-spurred turmoil. This price hike is an indication of the volatile market into which Atlanta intends to sell up to $200 million in bonds to help secure affordable housing in the city.
Atlanta City Council members did not discuss in late March details of the collapsing municipal bond market and its potential impact on the planned Housing Opportunity Bond. Instead, two committees of the Atlanta City Council agreed to double the amount of the proposed bond issue – from an amount of up to $100 million, to an amount of up to $200 million.
Atlanta’s chief financial officer, Roosevelt Council, Jr. did provide a presentation to council members, in which he advised of three points:
- The pricing date of the bond is set for June 17;
- The importance of being prepared to go to sell quickly, if the market will bear the bond; the need to complete all preparations to sell the bond before the market is saturated by bonds from other local and state governments; and the potential to delay the bond sale if market conditions warrant;
- An assurance of the city’s ability to make annual debt payments of an estimated $13.7 million. Or, alternatively, $5 million a year for the first two years, in interest-only payments to preserve the city’s general funds during the anticipated revenue shortfalls and expenses related to COVID-19 – which Council said are projected to last for up to two years.
Atlanta taxpayers are to be responsible for repaying the debt and all associated costs and fees. To make the payments, Atlanta agrees to use its “unlimited taxing power” to assess property tax rates at whatever rate is necessary, according to the legislation, 20-O-1185.
Members of the Atlanta City Council voted in March, in two council committees, to double the size of the planned bond offering. In February, the initial legislation called for a bond of up to $100 million. The sum was raised to $200 million in committee votes taken March 24 and March 25. The council is slated to vote on the proposal April 20.
At the time of the committee votes, reports abounded of investors pulling a record amount of money out of the municipal bond market. In response to the flight to cash, local governments across the country had pulled some $7 billion in planned debt sales off the table – succumbing to rising yields and underwriters who didn’t want to take on more inventory, according to a March 13 report by Bloomberg.
Pasadena, Ca. was the city government that saw rates jump in March. The rate soared to 5.77 percent from an average yield of about 1 percent on tax-exempt securities, according to an April 7 report by Bloomberg. The city’s credit rating wasn’t an issue – like Atlanta, Pasadena has an investment grade rating.
The rush to cash was evident in the daily offering of bonds for resale. The average daily offering of $590 million in January and February rose to more than $2 billion a day in March as bond holders sought buyers, according to a guidance report issued in April by Blackrock. This flood of sale of existing debt caused the market to freeze for new issues – which is what Atlanta’s new bond issue would be – Blackrock’s report observed:
- “The new issue market essentially froze. Deals were undersubscribed (versus the year-to-date average subscription rate of 5.5x), causing issuers to postpone the majority of the forward calendar. As a result, the market saw only $17.2 billion in issuance in March, significantly below the month’s five-year average of $31.1 billion, bringing year-to-date total issuance to $86.7 billion, up only 14% year-over-year.”
The credit rating aspect of bond sales is volatile as the buyer side of the deals.
Two recent examples include ratings for entities in New York and Virginia, as issued by Moody’s Investors Service.
Regarding New York, the rating was downgraded to negative from stable for the state authority that handles debt issued for dormitories:
- “The rapid and widening spread of the coronavirus outbreak will have a significant impact on the state of New York’s credit profile given a deteriorating global economic outlook, falling oil prices, and financial market declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.”
The rating for the non-profit Virginia Housing Development Authority, created in 1972 by the state of Virginia, escaped a coronavirus-tinged rating for a planned $150 million bond issue. The money is to buy or finance loans on single-family houses:
- “The coronavirus crisis is not a key driver for this rating action. We do not see any material immediate credit risks for VHDA. However, the situation surrounding Coronavirus is rapidly evolving and the longer term impact will depend on both the severity and duration of the crisis. If our view of the credit quality of VHDA changes, we will update the rating and/or outlook at that time.”
Here’s a snapshot of Atlanta’s path toward issuing a Housing Opportunity Bond in Summer 2020:
- Feb. 17 – A proposed Housing Opportunity Bond in the amount of up to $100 million is introduced to the Atlanta City Council;
- March 11 – World Health Organization declares COVID-19 pandemic;
- Mid March – Global markets reel. Resale government bonds flood the market as investors shift to cash. The sell-off prompts local governments to halt a report $7 billion in planned debt sale;
- March 24 – The amount of Atlanta’s planned Housing Opportunity Bond is raised from up to $100 million to up to $200 million by the Atlanta City Council’s Community Development and Human Resources Committee;
- March 25 – The council’s Finance Committee approves the $200 million figure – but not by unanimous vote. The failure to reach unanimous consensus means the council will vote on the measure as a stand-alone item on the agenda, increasing accountability for the vote;
- April 20 – The Atlanta City Council is slated to vote on the proposed Housing Opportunity Bond in the amount of up to $200 million.
- June 17 – The bond is to be priced and, possibly, immediately put to market, according to the city’s chief financial officer.
This is a snippet of Roosevelt’s presentation to the council’s CDHS Committtee regarding the pending bond sale. After observing the planned June 17 pricing date, Council observed:
- “That roughly gives us almost three months to see where the pandemic and the bond market will be at that time. Understand that if the market is not favorable, we will look to suspend the transaction and determine just what our next steps are.
- “But if the bond market does rebound somewhat by June 17, or come out of this, [inaudible], several bond transaction will probably flood the market because they are waiting just like we are.
- “The biggest challenge for me [inaudible] should be prepared to issue. Otherwise, we’ll be late to the market and, when you’re late to the market, you run the risk of not being able to issue the bonds at a very favorable rate because there won’t be that many investors.”