WASHINGTON - Finance officials in Maryland, like their counterparts at state and local governments across the country, are closely monitoring conditions in the municipal bond market, hoping for an opportunity to sell debt.
For Phil Thompson, assistant finance director of the small Maryland county of Worcester, trying to get a handle on a tumultuous market that he's not sure "anyone has a handle on" has led him to postpone a $35 million deal that was scheduled to price tomorrow.
Thompson said watching rates in the muni market jump to the mid-5% range has been "scaring the heck out of us."
The general sentiment from market participants is that issuers can go to market if they need to, but it's the higher rates that are keeping them from doing so if they do not have a pressing need for cash.
"To date, it appears that the reluctance to enter the market is related more to pricing than to the actual ability to find a buyer," a Standard & Poor's report released Thursday said. The rating agency said it expects that when liquidity is restored to the market there will likely be a "significant burst of borrowing activity from both pent-up demand and ongoing capital needs."
Matt Fabian, managing director at Municipal Market Advisors, said he thinks issuers need to begin to return to the market now because it might not be able to absorb that burst of new issuance.
"Issuers need to come to market," he said. "The markets are open. Issuance is possible; it's just at higher yields than the issuers want to tolerate."
He said the market is evolving to a "new normal," which could mean that the current rates issuers are so resistant to now may become standard. The market is showing "greater supply needs than we've seen in a long time ... and that, plus the greatly diminished demand from leveraged buyers, is going to keep yields higher than they have been in five years," Fabian said. "I think the calendar recovery is going to be gradual."
Worcester County had hoped to sell $35 million of general obligation public improvement bonds competitively tomorrow to finance renovations and additions to Pocomoke High School. But the deal will be put on the shelf for now.
"We're postponing," Thompson said. "It appears to still be a very unsettled market based upon what we're seeing. We're hopefully going to do something in the relative near future. But the rates are pretty unattractive from what we're seeing."
Thompson said the county has enough capital to hold off on the sale and the high school renovations will not be delayed.
"The project's under way," he said. "If we have to carry it for some time, it's not that detrimental to the county."
The state Community Development Administration had three deals on its schedule for the month that have yet to come to market - $130 million of single-family residential revenue bonds that had been expected on Oct. 6, $13 million of multifamily housing revenue bonds set for last Thursday, and $67 million of multifamily development revenue bonds set for sale today.
Proceeds of the CDA's issues typically go to help finance mortgage loans for first-time homebuyers and other housing aid programs.
Roy Westlund, deputy director of the CDA, said he too is watching the markets day by day, hoping to bring the deal by early to mid-November.
"The markets are at not where most of us want them to be," Westlund said. "Rates are higher than what they normally would be."
Westlund said he thinks the deals that are going to market are from issuers that have no other choice.
"I think most of us are sitting back and hoping things will level out more, and that you get more investors out there that are willing to invest," Westlund said. "I mean, you've heard it time and again - there's no confidence in the market right now and so investors are very hesitant to buy anything ... except maybe Treasuries."
Patti Konrad, Maryland's director of debt management, said the state has not had the problems that have faced other states and municipalities because it is not currently in the market.
"We're very fortunate because we issued in August, and our next scheduled issuance wouldn't be until late winter, early spring," Konrad said. "We're just watching. And fortunately, we're watching without an immediate need for financing. We're not in that position."
Alison Williams, finance director of the Maryland Transportation Authority, has been monitoring the markets for a time hoping to bring $425 million of grant anticipation revenue vehicle bonds to market for a toll-road project. The Garvee deal was canceled in mid-September following news that the federal highway trust fund was poised to run out of money.
The MdTA Garvees are backed in part by trust fund dollars. Congress approved an $8 billion transfer of general funds to the highway trust fund on Sept. 11, but a few days later, Lehman Brothers declared bankruptcy and the credit crunch worsened for the municipal bond and other financial markets.
"There's no change in our plan right now - we have not as yet set a new sale date," Williams said, adding that the authority's financial advisers "basically just agreed that the markets are still too volatile."
Williams pointed to the MdTA's ratings and usual demand for its bonds as a reason to hold off. Standard & Poor's gave the issue a AAA with a stable outlook, Fitch Ratings gave it a AA and Moody's Investors Service assigned a Aa2.
"We want to get a good rate; it's a good credit," Williams said. "We don't want to have to pay a premium because the markets are unsettled, so we have the ability to wait it out."
Last week's Standard & Poor's report predicted that issuers will weather the current conditions overall and that issuance will rebound after conditions settle down.
"In our experience, governments typically borrow more at times of economic stress and uncertainty and, in our view, there is no reason to believe that the balance of 2008 and 2009 will be any different," the report said.
The rating agency said that when issuers postpone borrowing for capital expenditure that "ripples" through to their operating performance.
"Frequently, issuers use current funds to meet initial capital costs and then reimburse themselves from bond proceeds," Standard & Poor's said. "We believe that failure to issue bonds in these circumstances can have widespread operating consequences, requiring possibly raising revenues or reducing expenditures."
