The takeover of a Long Island county’s finances by an oversight board last week looked like an opportunity to some investors who hoped to pick up an improving New York credit on the cheap.
The Nassau County Interim Finance Authority imposed a control period on Nassau County last week after finding that its $2.6 billion 2011 budget had a deficit greater than the 1% that mandated a takeover.
What happens next is uncertain after County Executive Ed Mangano filed a suit on Monday in state Supreme Court seeking a permanent injunction blocking NIFA’s action.
Fred Yosca, manager of underwriting and trading at BNY Capital Markets, said he’s had some inquiries from people working on the assumption that the world would interpret the takeover as bad news.
“In reality it’s good news, so you’d be buying bonds cheaper that are actually in an improving credit situation,” Yosca said. “Now you have the control board running the show instead of the county itself and they have more power to get things done.”
However, there have been too few secondary-market trades of Nassau County general obligation debt in recent days to say with confidence how they’re trading, he said.
On Friday, a dealer sold a block of more than $1 million of Nassau GO 4s of 2016, according to the Municipal Securities Rulemaking Board.
The dealer sold the bonds to a customer to yield 3.35% on a 4% coupon, data, 150 basis points over Municipal Market Data’s triple-A benchmark. The bonds originally priced on Dec. 2, 2009, yielding 2.66% with a 4% coupon, 62 basis points higher than MMD.
Yields on those bonds already edged up over the past two months, and a few hours before NIFA announced its takeover, a customer bought a block of $200,000 yielding 3%, which was 114 basis points higher than MMD.
Spreads between MMD’s triple-A and A benchmark on 30-year bonds have widened slightly during that time, from 82 basis points on Dec. 2 to 86 basis points on Friday.
“While spreads to tax-exempt high grades were a little wider, prices were stable to a little better,” said Matt Fabian, managing director at Municipal Market Advisors. “In theory, [the control period] is a good thing for bondholders, forcing a more thorough and non-political discussion of the county’s budget issues and solutions, but you can’t discount the effect of headlines feeding fear.”
Herman Charbonneau, senior vice president and manager of public finance, at Roosevelt & Cross Inc., said his trading desk has seen some change in Nassau bonds in the secondary market since NIFA’s action.
“They’ve seen some stuff up for bid, tax-exempt GOs, some insured, some uninsured, and they are seeing them cheaper,” he said.
On Thursday they saw bonds maturing in 2025 offered at about 138 basis points above MMD, substantially cheaper than when the issue came to market, he said.
Mutual funds have reported more than $30 billion of redemptions since November, which may be a factor in Nassau redemptions, Charbonneau said.
“Some of them have bonds to sell and Nassau’s — just because of the headline factor — may rise to the top of the list of things to be sold,” he said. “That might be part of the weakness we’ve been seeing.”
Charbonneau said that over time the perception that NIFA would take over the county’s finances had already led to a increase in yields.
Moody’s Investors Service, which downgraded the county in November to A1 with a negative outlook, described the imposition of a control period in positive terms in a report Friday.
“The change in NIFA’s status should help to stabilize the county’s fiscal position by providing NIFA with additional tools to help instill fiscal discipline on the county,” the report said.
“Several other New York state control boards, including the Buffalo Fiscal Stability Authority, have successfully strengthened the financial operations of stressed municipalities through similar control structures.”
Moody’s warned that a protracted legal challenge by Mangano to change NIFA’s role could lead to a period of greater financial stress should there be a protracted dispute between the executive and NIFA.
“Given that the county heavily depends on market access to meet their ongoing liquidity needs to fund operations, a breakdown in the political process due to such a conflict could hinder the county’s market access and thereby further weaken an already narrow liquidity position,” the Moody’s report said.
NIFA’s action also did not prompt any rating action by Fitch Ratings.“A 1% operating deficit is a low threshold for invoking the takeover by a control board of a local government, thus NIFA’s action is not in and of itself reason to review the county’s rating,” Fitch said in a special commentary on Friday.
“While the risks identified by NIFA well exceed this threshold, they are similar in magnitude to those recognized when Fitch affirmed its AA-minus rating in November.”
Standard & Poor’s rates Nassau’s outstanding GO A-plus with a stable outlook.
The county has about $1.4 billion of general obligation and GO-guaranteed debt outstanding. Outstanding NIFA sales-tax revenue bonds total $1.7 billion.
