Baltimore GO deal sails ahead amid investigation of former mayor

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Baltimore's $85 million general obligation bond deal is expected to sail into the municipal bond market without fallout from the controversy that brought down the city’s mayor.

Maryland’s largest city is scheduled to sell $64.855 million of tax-exempt and $20.145 million of taxable consolidated public improvement bonds Tuesday in a competitive transaction.

It will come five days after Mayor Catherine Pugh’s resignation amid public corruption probes centering on large-scale sales of her self-published children's book to institutions she was involved with, including the University of Maryland Medical System, where she was a board member.

Pugh, who was elected mayor in 2016, had taken a leave of absence in early April for pneumonia that coincided with the book sale controversy.

Howard Cure, director of municipal bond research at Evercore Wealth Management, said the GO deal is arriving an opportune time for Baltimore despite the troubles at city hall because there is strong demand for deals with little supply.

He said the recent turmoil would likely not be a concern for the market since there has been a process in place to keep day-to-day city operations afloat. City Council President Bernard C. “Jack” Young took on the acting mayoral role when Pugh took her leave of absence and under city charter will remain mayor for the rest of her team that expires in December 2020.

“I don’t think it will impact the finances of the city which are pretty strong,” Cure said. “What concerns me more about Baltimore is social justice issues, particularly the high murder rate and whether that will hurt future economic development.”

The city retained Aa2 rating from Moody’s Investors Service and AA rating from S&P Global Ratings ahead of the deal and amidst the Pugh controversy. Both assign stable outlooks.
The rating agencies noted that the Pugh controversy isn't expected to play any role in the city’s near-term credit conditions.

“Moody’s local government methodology takes into account municipalities will have leadership changes over the lifetime of the bonds,” Nisha Rajan, lead Baltimore analyst for Moody’s, said in a statement. “These changes are assessed with the city’s overall credit factors, along with its financial health, governance, and oversight. These variables remain intact in Baltimore.”

Proceeds from the bonds will fund various capital projects throughout the city, whose population numbered 620,000 in 2018, according to Moody’s. Public Financial Management is financial advisor on Baltimore’s first competitive GO sale since a $143 million sale in July 2014.

Baltimore is just four years removed from riots that grew out of protests about the death of 25-year-old Freddie Gray, who died a week after suffering spinal cord injuries while in police custody. While the unrest caused widespread financial damage to people and businesses on the front line, Moody’s and S&P noted that the city has experienced positive economic growth lately aided by several large-scale development projects.

Daniel Berger, senior market strategist for MMD-Refinitiv, said the city of Baltimore is thinly traded and he has seen “no demonstrable impact” or changes to how the municipal market is receiving its GO bonds since they were last issued. The last Baltimore GO transaction on Halloween 2017 featured $226.955 million priced by Bank of America Merrill Lynch in a negotiated transaction.

“I believe the scandal will have minimal impact on the deal pricing and investor demand — at least from institutional investors — since the issues do not seem to have any relationship to Baltimore’s finances,” said Janney Capital Markets municipal analyst Alan Schankel. “It may deter some retail interest, but I suspect the impact will be small.”

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Primary bond market Infrastructure City of Baltimore, MD Maryland