By David Pendered
Atlanta is scheduled to sell more than $550 million in revenue bonds Tuesday in order to refinance existing water and sewer bonds, according to bondbuyer.com.
The refund itself appears unexceptional, though the sale may have prompted credit rating agencies to review – and improve the rating on – Atlanta’s $3.1 billion in outstanding wastewater system revenue bonds.
However, the sale planned for Tuesday does offer a window into the current state of municipal debt at a time Atlanta prepares to sell $200 million in bonds for a new Falcons stadium. Atlanta will be selling into a volatile market in which buyers demand increasingly high interest rates for bonds maturing in more than 10 years, according to an Aug. 8 report by Morgan Stanley Wealth Management:
- “Longer ‘Aaa’ rated benchmark tax-exempt yields increased almost twice as much as [U.S. Treasury] yields for 15-, 20- and 30-year maturities, rising 34, 38 and 45 basis points, respectively,” states the report from Morgan Stanley. (A basis point is 1/100th of a percentage point.)
What this means is that Atlanta can expect to pay interest rates for the stadium bonds that are higher than historic averages, in comparison to a shorter-term debt.
Details of the structure of the bond package for the stadium bonds haven’t been widely discussed. The general terms are provided in a proposed funding agreement between the city and its development arm, Atlanta Development Authority, doing business as Invest Atlanta.
But it’s safe to assume some or all will mature in more than a decade.
Atlanta has given itself until Dec. 31, 2050 to pay off the stadium bonds. The date was set by the Atlanta City Council when it voted in March to extend the hotel/motel tax in order to finance the stadium bonds.
For a comparison, the water and sewer bonds to be sold Tuesday are to mature in 2039, the same year as the existing bonds, according to a report by Fitch Ratings. This is one reason to watch the rate Atlanta agrees to pay on the $550 million-plus in water and sewer bonds.
Atlanta and other governments borrow money in a market that’s not immune to the challenges facing others in this time of economic turmoil.
The snapshot of the municipal bond market provided by the report from Morgan Stanley Wealth Management indicates investors are hesitant to lock into long-term investments. The note to investors points out the relative merits of keeping their options open to buy as rates increase over time:
- “Specifically, some investors may wish to add exposure at the new, higher yields, while others may wish to limit duration depending upon the structure and weightings of their individual municipal bond portfolios in order to prepare for what could be a protracted and uneven ascent toward higher rates.”
A number of factors influence yields paid on municipal bonds. One is investor sentiment about the government’s ability to pay the debt over the long term.
Detroit has garnered headlines this summer over its bankruptcy filing. Detroit became the eighth city or county to seek bankruptcy protection since 2010, according to governing.com.
A total of 36 bankruptcy filings have been submitted since 2010 by governmental entitites, including one in Georgia – the Hospital Authority of Charlton County. The Charleton hospital authority’s request for protection under Chapter 9 or Chapter 11 was denied in 2012 by the U.S. Bankruptcy Court in Waycross.