Thursday, March 27, 2008

Indiana Officials Won't Talk To Bloomberg About Auction Rate Bond Meltdown

Bloomberg takes a look at the double-digit interest rates now confronting public authorities across the country on stadium financing deals after the meltdown in the auction rate bond market earlier this year. Indiana's Lucas Oil Stadium is taking one of the biggest hits in the country, but nobody in Indiana will discuss the problem with Bloomberg, which writes:

The auction-rate bond crisis is raising borrowing costs on more than sewers and hospitals, forcing some states to pay three times higher interest on 65,000- seat sports arenas with moving roofs and 50-foot video displays . . .

At least five states and cities -- Louisiana, Indiana, New Jersey, Washington, D.C. and Cleveland -- have used tax-exempt auction-rate bonds to host teams in the NFL, National Basketball Association and Major League Baseball since 2005.

The debt was billed by bankers as a cheap alternative to conventional fixed-rate bonds. Like sewer districts, universities and hospitals, state agencies in charge of economic development jumped at the chance to lower costs and still borrow for 20 or 30 years. Owners of the Giants, New England Patriots and Dallas Cowboys took part too, selling taxable auction-rate debt for their share of stadium projects.

The auction-rate market is now backfiring on hundreds of borrowers as fallout from the collapse of the subprime mortgage market threatens credit ratings of the world's largest bond insurers, deterring investors from even the safest debt. The bonds' annualized interest rates reset at auctions held every seven to 35 days. When there are no bids, rates jump to the maximum proscribed in penalty terms . . .

The Indiana Finance Authority borrowed $611 million between 2005 and 2007 to help build Lucas Oil Stadium, a facility for the NFL's Indianapolis Colts that's scheduled to open later this year. Interest rates on some of the auction bonds, secured by state appropriations and insured by New York-based FGIC Corp., jumped to 15 percent on Feb. 13 from 3.4 percent on Feb. 6, data compiled by Bloomberg show. As of March 26, they were 5 percent.

Jennifer Alvey, public finance director at the Indiana Finance Authority, declined to comment . . .

To help ease the pain, the feds are allowing state and local governments to bid on their bonds to prevent the interest rates from adjusting--at least in the short run. In Indiana, there has been virtually a complete news blackout on the potential financial calamity for the State of Indiana and the City of Indianapolis, save for this one earlier report in the Indianapolis Business Journal. You would think it would be newsworthy that taxpayers were paying a 15% interest rate on Lucas Oil Stadium bonds. Who would have thought that high of an interest rate was even possible with publicly-issued bonds?


Concerned Taxpayer said...

The public doesn't have time to worry about little things like this.

They are more concerned with making sure Andre Carson is elected to Congress, and Kenneth Ackles remain county coroner, even if he doesn't know anything about the job.

guy77money said...

Looks like they have no cap on the interest rate. Check out the administration and finanace committee meeting last ten minutes for a short explanation on how the credit markets on these type of bonds work ( PROPOSAL NO. 135, 2008 -approves the issuance of one or more series of City of Indianapolis,
Blogger: Advance Indiana - Post a Comment Waterworks District Net Revenue Refunding Bonds in an aggregate principal amount not to
exceed $110,000,000 and other actions in respect thereto

Apparently these bonds reset every 35 days and no one is buying them.

M Theory said...

This is just the beginning...there's much more to come.

Thanks, Gary for covering this and being on top of things.

Maybe now people can see why the politicians lied and told us property tax repeal is not possible. Property tax is their backdoor to eminent domain.

N_s_crow said...

The state is getting out of these bonds (these are converting now and the final auction rates will be converted to a different mode on 4/3, which will be bearing interest at a very low variable rate (approximately 2.20ish). Yes this wasn't a great thing to have happened, but for a 30+ year project, 6 months of high rates won't kill the deal. And don't say but those bonds could have issues as well. Not really. The main problem with the auction rate market is that the bonds are not cash equivalents. If an investor wants to sell them, the only way was at the next auction. If the auction failed because there weren't enough buyers, you were stuck. The mode they are converting to (Variable Rate Demand Bonds, VRDB's) have a put built into them via a standby purchase agreement with a bank, whereby if the remarketing fails, the bank will buy them back from the investor. Also, VRDB's are eligible to be held by Money Market funds which are gaining cash by the truckload daily right now.

Oh yeah, this shouldn't be a political thing. Contrary to what Diana Hamilton said in the IBJ article, the prior adminstration had issued approximately $260 million of auction rate bonds for the State Office Building Commission and the Indiana Transportation Finance Authority.

Hoosiers, the stadium bonds aren't paid with property taxes. You should know that.

Money 77, there are interest rate swaps on these deals so the thought was you didn't need caps on the bond rates because the state would be receiving an index that would mimic what was being paid on the bonds. Unfortunately the auction rate market went to hell in the interim. The VRDB market does track that index pretty well and the IFA has the history to prove it if asked.

Citizen Kane said...

Forgive me if I don't believe that there is nothing to worry about. The arrogant, know-it-all, too-smart for their own good, bankers are the reason that there is a credit problem. And to pretend that the problem is solved by switching from one variable-rate bond to another misses the point. The goal of creative financing and refinancing is to make the financial brokers rich; it is not intended to benefit debtors. To be sure, there will be many other reasons to refinance this debt over the years until we find ourselves in the same situation as with the Hoosier Dome - no asset, same liability.

But in light of the fact that the stadium financing, convention center financing and hotel subsidization is part of a pyramid scheme (The Super Bowl quest being another addition to the ever growing pyramid) to pretend that downtown is vital, the type of financing chosen by the State makes perfect sense.

And you're right, it is not political because both political parties are robbing the taxpayers.