As members of the various House finance divisions scrambled this week to ready their capital bonding proposals, across the Capitol Mall, Department of Finance staffers were keeping a wary eye on the bond market.
Could the state capital investment bill be affected by what some financial analysts are calling a developing bond-insurance crisis?
Over the past months, financial problems have surfaced with some major bond insurers, as they have found their own investments entangled in the subprime mortgage mess. Their poor investments have led to a lessening of their credit rating, in some cases. And without a doubt, some municipalities have found limited access to purchasing bond insurance, and their overall cost of borrowing increasing.
As anyone borrowing money for a new car or house knows, credit counts — and the better your score, the better the interest rate and the more apt you are to get money.
The House Capital Investment Finance Division meets Feb. 19. (Photo by Sarah Stacke)It’s no different for the state when it goes looking for financing.
If the state has good credit, most likely it will have little trouble accessing the credit market, said Kathy Kardell, Department of Finance assistant commissioner.
Fortunately, the state’s credit rating is almost perfect with the three top rating firms; Fitch Ratings and Standard & Poor’s rate it at AAA, while Moody’s Investors Service gives it a notch below at Aa1.
“The people that will have difficulty (accessing funds) will be lower rated credits who, at least in the past, needed credit enhancement, which they typically purchased in the form of municipal bond insurance,” Kardell said. These days, only one of the big four insurers has seen their credit rating remain in good standing, she said.
What buyers want
It’s not only the state’s good credit that will make bonds attractive to investors, it’s the type of bond that would be issued. In the case of capital improvements, they are funded by general obligation bonds.
Kardell explained that these bonds are backed by the full faith and credit of the state. According to the department Web site, this means the state has pledged to levy a statewide property tax to pay the debt service costs, if necessary.
In short, the “state will do whatever it needs to do to pay the bonds off, if it wants to maintain its credit rating,” she said. “If you don’t do that, carry through on your general obligation pledge, your credit rating would be tremendously affected and your ability to access funds in the market would too.”
The credit crunch may not necessarily be affecting state-financed projects, but for small communities or agencies with lower credit ratings, there could be problems.
As with each bonding year, communities come forward to the Legislature with projects they’d like to have the state support. For some communities with lower credit ratings, however, getting eligible projects onto the state’s bonding list may be crucial to the project’s future.
Kardell explained that a small community may be rated in an A category, and in the past, if they were selling bonds of any size, they would almost always access bond insurance to attract buyers. Now, that may not be an option.
In terms of selling bonds, whether at the state or local level, investors are looking to underlying credit, she said, and obviously the better the credit the happier the buyers are going to be.
Buying and selling
So, once the state gets the OK to sell bonds, who buys them? Kardell said it’s generally not banks, but bond funds, insurance companies and individuals — especially through their trust accounts.
Right now, bond rates are very low for investors, making it a good time for the state to sell bonds. She pointed to a recent bond buyer index showing general obligation bonds at 4.47 percent on a 20-year bond. “In the last 12 months it has been as high as 4.81 and as low as 4.08 percent,” she said. “So rates have been extremely low.”
As Kardell watches Minnesota’s capital investment bill move forward, she is watching the interest rate fluxuations closely.
The bond market, like the stock market, is seeing great volatility. If a capital investment bill is enacted, Kardell’s concern is scheduling the bond sale.
“We do our best to schedule the state’s sale around known bad times, like when the Federal Reserve is meeting or other events that could potentially affect the market. But that’s something you can’t control. If you are unlucky, we could be taking bids for our bonds on a day when rates are a little bit ziggy-zaggy.” But even so, the spikes are low, so the state most likely could be looking at paying out a relatively low interest rate, she said.