Rescue plan offered up for strapped muni borrowers
With Wall Street’s credit crunch turning costly for many states, cities and other government entities, a California financing agency says it wants to help municipal borrowers cut their interest rates on certain pricey debt.
Under the program, the California Statewide Communities Development Authority would buy floating-rate debt of municipal borrowers in the state from the investors who now hold the securities.
Some of that debt recently has reset to annualized interest rates of more than 10% as investors have pulled away. That has put an unexpected drain on municipal coffers.
San Bernardino County, for example, now is paying as much as 15% on $150 million of bond debt, said Gary McBride, deputy administrative officer for the county.
The development authority would convert the debt it buys to a low fixed rate for one year, giving borrowers time to work out other financing solutions, said Bill Doyle, a partner at law firm Orrick, Herrington & Sutcliffe in San Francisco and an architect of the plan.
“We want to provide a bridge” for borrowers, he said.
Federal and state authorities have been hunting for ways to remedy the blow-up in two once-obscure corners of municipal financing: auction-rate debt and variable-rate demand notes.
The bonds allowed municipalities in effect to borrow long-term at short-term interest rates. The rates are reset at daily, weekly or monthly auctions.
But the turmoil in financial markets in recent months has caused investors to shun many complex debt securities. The result: Most of the auctions used to reset yields on the floating-rate municipal securities are failing. That often leaves current investors stuck with the bonds and triggers high “penalty” rates for issuers.
In one extreme case, credit-rating firm Moody’s Investors Service on Tuesday warned that Jefferson County in Alabama might default on $3.2 billion in sewer debt because a surge in yields on its auction-rate debt was eating up the county’s cash.
The central idea behind the California development authority’s program is that the agency, which has issued $35 billion in debt since 1988 and is well known on Wall Street, would use its clout to temporarily back up any of its nearly 500 member municipalities that might have trouble refinancing, said James Hamill, a manager at the Walnut Creek, Calif.-based organization.
“We have a name in the marketplace, so people know what we do,” he said.
Some municipalities, however, already have launched refinancing programs. San Bernardino County’s McBride said he expected to pay off the problem debt with new debt by early April.
The Sacramento Municipal Utility District also expects to refinance its $400 million in auction-rate bonds soon, said Noreen Roche-Carter, the utility’s treasurer.
Still, she applauded the development authority’s plan. “I like knowing it’s out there as a backstop,” she said.
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