Bond market shaken

Urban Redevelopment Area Advisory Council discusses financing options

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— The city's advisory committee for redevelopment at the base of the Steamboat Ski Area will recommend that the city immediately begin exploring the option of borrowing up to $30 million this year because of a volatile bond market.

The city's Urban Renewal Authority would borrow the money through the issuance of municipal bonds. It would use about a third of the $30 million to pay off bonds issued in 2007. The rest would be used to pay for public improvement projects near the base area. Within its base area boundaries, the URA receives property and sales taxes above a base amount to repay the bonds it issues to finance projects, such as the new Ski Time Square roundabout and a planned public promenade at the ski base.

The URA's next bond issue originally was scheduled for 2009, but at Friday's meeting of the Urban Redevelopment Area Advisory Council the city's bond consultant said the city should figure out whether it makes sense to bond earlier.

"My recommendation is that we get it figured out sooner rather than later," said Alan Matlosz, senior vice president of investment bankers George K. Baum & Co. "Like yesterday."

At a Feb. 8 URAAC meeting, Assistant Finance Director Bob Litzau also discussed moving up the bond issue to take advantage of low interest rates. But the municipal bond market has changed drastically since then. Matlosz's advice was based not on a desire to lock in low interest rates, but a need to act quickly due to limited demand for municipal bonds.

While the Federal Reserve has been cutting its core interest rate, other factors have led to a shaky bond market. The city's existing URA bonds have a variable interest rate, reset weekly. At the time Litzau floated the idea of moving the bond issue up, the interest rate on the URA's bonds was 1.25 percent. Since then, it has gone as high as 3.02 percent and is now at 2.12 percent.

"The rates are bouncing all over the place," Litzau said.

No insurance

The Wall Street Journal reported March 13 that bulging supply could lead to prolonged uncertainty for the municipal bond market. The demise of several bond insurers also is contributing to the volatility, Matlosz said.

"There is no bond insurance," Matlosz said. "Last year, everyone was happy in the bond world. Now, they're not so happy."

There used to be as many as seven reliable bond insurers in the U.S., Matlosz said, before the subprime mortgage fallout that triggered the decline in the overall national economy took down several bond insurers that also were backing pools of mortgages. Now, Matlosz said there are "only two insurers that bring any value."

The decline in competition has allowed these insurers to raise their rates and only do select deals.

The URA's bonds are not secured by a bond insurer but by a letter of credit from Wells Fargo. But the situation in the bond insurance markets has led many others to turn to letters of credit, creating the same heightened demand and higher costs for that form of security.

Matlosz said the interest rate for a letter of credit has risen from .28 percent to .75 percent. He also said some banks have experienced such high demand that they already have issued an entire year's worth of letters of credit in the first three months of 2008. All of this leads to Matlosz's recommendation that the city get itself in line for bond security before it's too late.

Payback questions

URAAC member Bill Jameson said it is critical for the city to get a letter of credit nailed down while investigating whether to issue bonds this year.

Some members expressed concern, however, about the URA's ability to honor increased bond repayments. Litzau noted that developers plan to demolish Ski Time Square and Thunderhead Lodge this year, eliminating a source of sales tax revenue and decreasing property tax payments.

"I still have a concern from the payback standpoint for where our revenue stream is going to be with Ski Time Square coming down," Litzau said. "That's a big chunk that goes toward repayment."

But Steamboat Ski and Resort Corp. President Chris Diamond said such fears might be overblown.

"There's going to be shifts to other operations in the area," he said. Slopeside Grill owner "Chris Corna is going to have a hell of a year."

If the URA ends up going forward with a bond issue, it may be able to add items cut from its construction and design schedule for this summer because of budget shortfalls.

On Thursday, Litzau said the volatile municipal bond market is not having any direct effects on any other city finances. The URA's bonds are the city's only variable rate bonds, Litzau said, and the city does not have any major capital projects that it would need to bond for in the immediate future.

"As the city looks at future capital projects : then it can have an impact," Litzau said. "But we don't have any planned at this time, so it's not something we have to deal with immediately."

Comments

Geary Baxter 6 years ago

Nice call, Mr. Lizau. Too bad no one was listening. How is that going to affect the cost of living in Steamboat? Never mind, I already know the answer. Sorry workerbees, you'll just have to get ANOTHER job.

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steamboatsconscience 6 years ago

Implosion In High Yield Bond Funds http://globaleconomicanalysis.blogspot.com/2008/03/implosion-in-high-yield-bond-funds.html http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/03/25/BUNPVPMK8.DTL&tsp=1 In one of the more spectacular meltdowns in mutual fund history, Schwab YieldPlus - marketed as a higher-yielding alternative to money market funds - has plummeted to just $2.5 billion in assets from more than $13 billion in May.

The shrinkage reflects both a decline in the fund's asset value and a mass exodus by investors.

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otterbdone 6 years ago

Finally S.boat faces truth. Even Vail another notorius' stick thy head in sand and pretend, so we can sell, sell', is awake to this mortgage and credit crisis.

Vails plan

-do not spend any money on infrastructure unless absolutely necessary,since tax revenue will drop. -Eagle county only had 104 real estate transactions in January, dropped to fewest in 12 years. -Vails town councilmen that is a retired investment banker predicted Vail is not going to escape economic uncertainity.

[What do you think happen to S.boat?]

-Predictions in Vail are developers' finacancing will dry up, BUYERS WILL DISAPPEAR and stalls on some other developments.

Like S.boat, Vail has some of those who believe saying a recession isn't coming or is here may fool potential buyers. They speak all positive lines to project a false since of security.

Knowledge ends fear. Prepare and face for worse case scenarios. Be ready. Enjoy life along the way. Admit change can actually be exciting. If nothing drastic happens financially then S.boat will have plenty of reserves for a rainy day.

Start calling and writing S.boat leadership NOW to encourage speedy preparations and request leadership not fall prey to old S.boat policies of pretending we do not have a problem.

Encourage the newspaper to put all national truths about this crisis in the paper and quit worrying about trying to cover this with baloney issues that try to precieve we are not facing trouble.

Jewelry and ski/beach vacations will be the first to be cut back . Nothing new or unknown about that.

Keep moving forward on ideas to vary revenue sources. Do not count on all ski revenue. Support S.boat leadership that supports reality. Help them move to a new realm. Get on the BOAT. Steamboat is about to sail into uncharted waters.

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steamboatsconscience 6 years ago

California Rebuffs Buffett's New Muni Bond Insurer http://www.bloomberg.com/apps/news?pid=20601109&sid=a1wTfyj0f7sA&refer=home March 28 (Bloomberg) -- Billionaire Warren Buffett's new bond insurer may not get any business from California, the largest U.S. municipal debt issuer.

California Treasurer Bill Lockyer is leading more than a dozen state and local governments that say bond ratings exaggerate the risk of default, pushing up interest costs and forcing issuers to buy unneeded insurance. Lockyer said in a March 26 interview his state will shun Berkshire Hathaway Inc.'s venture because Buffett's company supports the current ratings.

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steamboatsconscience 6 years ago

This Could Be the End of Bond Insurance In the past few months, as Ambac and MBIA scrambled to recover over rumors they weren't liquid enough to meet soaring default worries on insured collateralized debt obligations (CDOs), it was always the municipal bond insurance division that investors knew would be there to pick up the slack.

When banks such as UBS (NYSE: UBS) and Citigroup (NYSE: C) rallied around plans to keep bond insurers alive, the idea was to let profits from the municipal bond division shore up losses on CDO products.

And when Warren Buffett offered to take the municipal bond portion off bond insurers' hands, nearly everyone scoffed, knowing full well that such a plan would lead to their quick demise.

In any case, it's nearly impossible to imagine bond insurers living to see another day without the ability to milk cash from insuring municipal bonds. http://www.fool.com/investing/value/2008/03/17/this-could-be-the-end-of-bond-insurance.aspx

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lovemysteamboat 6 years ago

I wonder what impact the inceased debt from the Iron Horse purchase (was it $10 million???) will have on any basic service bond issues we might need like water/sewer/and roads. This doesn't count the "extras" we all expect like recreation expansion (nordic center, new parks, howelson expansion), housins subsidies, arts, and the laundry list of funding requests. Who recommended variable rate bond financing?Is the Iron Horse also a floating rate? What city council spent our reserves down towards the minimum and then choose risky financing options? New council,please learn from past mistakes.

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Scott Wedel 6 years ago

The idea that in the middle of a crisis on confidence is the time to act as a seller of bands is so wrong. Right now the bond insurers may be going down due to underwriting so many bad risk transferrance deals. This uncertianity will resolve itself with either the existing recovering or other firms going into that business.

And this whole controversy over municipal bonds ratings having a slightly different system than corporate bonds (basically an A rated muni has the same risk as an AAA corporate, but ends being sold at the same price as a corporate A). The big states of NY and California have indicated they are no longer going to accept the status quo and they are too big for the bond insurers to ignore. A deal will be reached.

Should be obvious this is not the time to be issuing bonds. Wait until big states with top notch experts think that terms are good and start refinancing some of their existing debt.

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otterbdone 6 years ago

Steamboatsconcience

Did you check out the other part of Bloomberg.com article?

-31% sales loss of vacation homes already compared to just last year. Data from Nat. Assoc. of Realtors.

-Second/vacation homes are discretionary purchases and there is a natural tendency to pull back from big ticket items in periods of uncertainity.Comment from the Chief Economist of Realtors.

S.boat has a enormous chance of great financial loss since vacation homes and residual revenues bulk up the tax bal. sheet.

Notice hardly no comments here even though our future is questionable. People locally would rather spend time blogging in outer space rather than organizing talents to nip a sunami that likely is coming.

S.boat has mega numbers of retired and active financial attorneys,bankers,insurance specialists,etc. We all need to begin now[ already maybe too late] gathering statistics and ideas to insulate Routt County.

Who else believes Routt County could be approaching trouble and is worth protecting as much as possible?

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