When triple-A rated Cold Spring Harbor Central School District in Long Island, N.Y., has sold short-term debt in years past, finding bidders wasn't a problem. But with the credit markets nearly frozen, even top-rated issuers are crossing their fingers.
The district hopes to take bids tomorrow for $7 million of tax anticipation notes. Munistat Services Inc. is financial adviser on the deal.
"We're not sure what's going to happen at this point," said William Bernhard, the district's assistant superintendent for business. "We're not expecting the same kind of response we've had in past years, but who knows?"
While some debt is getting sold, conditions in the municipal bond market have deteriorated to the point where there has been a big drop-off in volume - September new-issue bond sales fell 40% nationwide to $19.9 billion compared to the same month last year, according to Thomson Reuters data.
Issuers mainly have been holding back larger deals as long-term tax-exempt rates have soared in recent weeks. While smaller issues and note deals have been getting done, if at higher rates, the short-term market showed signs of locking up last week as the federal financial bailout planned suffered setbacks. The Bond Buyer's one-year note index jumped a quarter of a percentage point last week to 2.44%, its highest level since January.
In the past, the Cold Spring Harbor district, which serves 2,000 kids and has a $53 million annual budget, would get five or six bids from commercial banks, Bernhard said. Despite an uncertain market, the district can't hold back the deal because it has cash-flow needs.
The district is split between two towns - Oyster Bay and Huntington - in two counties, Nassau and Suffolk, which means it gets its tax collections from either in different months. Oyster Bay taxes come in November and December, whereas Huntington taxes come in late January.
"We need to meet our payroll and our accounts payable, and we time the issue so that we don't borrow too early, we just borrow when we need it," Bernhard said. "We have a good enough relationship with our banks, [so] that if we had a crisis situation I'm sure we could negotiate something. We'd really have no option .... We just hope people are interested in our Tans."
Standard & Poor's assigns the district a AAA with a stable outlook.
In the district's favor is its bank-qualified status, which several financial advisers said was important in order to attract bidders at a time when there are fewer underwriters in the market.
"We've definitely seen an increase in prices, probably anywhere from 50 to 100 basis points depending on the quality and the type of instrument, as an example," said Mark Vislosky, president of Fiscal Advisors & Marketing Inc. "If you're looking at short-term instruments, it's largely the difference between whether or not they're designated and qualified."
Issuers that sell less than $10 million of debt a year can be bank qualified. In addition to the tax-exemption for interest, a commercial bank gets an 80% carrying deduction - a deduction on interested expense incurred in investing in bank qualified debt - on their income taxes.
"If they're not designated and qualified it cuts out a lot of banks that would hold them in their portfolio," Vislosky said.
Charles Bastian, a financial consultant at Bernard P. Donegan Inc., said his firm was working with clients to try to make their "financial plans a little more flexible to keep more of a bank-qualified status longer if possible, before or as they are transitioning to serial bonds."
Of five competitive one-year or less note sales in New York listed on Thomson Municipal Market Monitor last Thursday, all were bank qualified. Putnam County Saving Bank picked up $450,000 of bond anticipation notes for the Brewster Central School District at 2.75%, beating out JPMorgan Chase. JPMorgan beat out Evan National Bank and M&T Bank to pick up $5.8 million of Bans from the town of Evans at 3.08%. Commerce Capital Markets won $2 million of Tans from the Lynbrook Union Free School District at 2.57%, beating out HSBC Bank and State Bank of Long Island. HSBC won Remsen Central School District's $500,000 of Bans at 3.09% over bidders JPMorgan and First Niagara Bank. The town of Volney had a single bidder at 3.65% - Pathfinder Bank - on its $1 million of Bans.
Bastian said his firm tests the market to see if it can get a rate that is acceptable to clients and tries to pull back if it's not.
"If there's an issue that has to be done due to timing constraints then we'll see if it's still doable," he said. "If we do not have to do it, we can still test the market and go with a rate if it's a good market rate."
Flexibility is key these days. Last week, upstate Erie County privately placed $75 million of revenue anticipation notes with Bank of America NA after Roosevelt & Cross Inc. was unable to obtain financing to allow it to underwrite the notes along with $84.7 million of Bans the previous week.
Moody's Investors Service rates the Erie County Fiscal Stability Authority Aa2 and Fitch has given the financial control board an implied AA rating. Moody's rates the county Baa2 with a stable outlook, Standard & Poor's rates it BBB-plus and Fitch Ratings assigns a BBB-minus rating.
The county needed the funds to make payroll and other expenses this month.
The debt was to have been issued by the Fiscal Stability Authority as a compromise between the agency and Erie County over who would sell the debt. The Ban issue is still up in the air and the county comptroller's office said that it could no longer advance money for capital projects that were underway.
Although Roosevelt & Cross was underwriting smaller competitive bond deals in New York last week, it seemed unlikely the firm would be underwriting the Bans since the authority was considering litigation against it. The county budget director, comptroller, and the authority plan to meet today to figure out a plan for the Bans.
While some issuers may be sitting on the sidelines, the uncertainty doesn't mean that there's a one-size-fits-all solution.
"We're certainly not taking a blanket approach to the whole market and saying don't sell anything right now or only sell notes, because each of them have unique circumstances," Vislosky said. "Obviously in trying times like this if you're able to regroup and issue notes that might be the better avenue until we can get through this mess, which might take three or four months to work through the system."
Larger deals in the state have largely been on hold. One exception last week was a $300 million New York City Transitional Finance Authority building aid revenue bond deal.
Two New York State-backed deals are on the day to day calendar for the time being: A negotiated $394.8 million Dormitory Authority of the State of New York mental health facilities revenue bond deal and a $148.7 million competitive general obligation deal.
"Given the unprecedented turmoil right now on Wall Street, clearly conditions within the municipal bond market are very difficult right now for everyone involved, even high-quality issuers like New York State," Matthew Anderson, a spokesman for the state's Budget Division, said in a statement. "That said, in order to best protect taxpayer dollars, we are carefully weighing our options and will proceed with these issuances when we determine that conditions are more advantageous."
Long-term interest rates as represented by The Bond Buyer indexes were at their highs for the year last week. The 20-bond index rose to 5.36%, its highest level since December 2000.
The Long Island Power Authority has also been in a holding pattern with its planned $550 million electric system revenue bond sale. The utility delayed putting the preliminary official statement out by a week because of market conditions before finally releasing it on Sept. 23 but without a sale date.
"We thought is was best because we're optimistic the market will come back into more normal levels," LIPA chief financial officer Elizabeth McCarthy said. "We wanted to be ready when it did."
The authority is monitoring the short-term market to get a sense of what kinds of deals are going on these days. "We would like to get in as soon as we can and as soon as it's the right time but we're not facing any imminent problems," McCarthy said.
