El Paso, Texas, which is cutting police overtime and holding some jobs vacant, will have to spend an extra $17 million on bonds to finance a minor-league baseball stadium after an initial attempt to sell the debt failed.
Goldman Sachs Group Inc. (GS:US) took over marketing of the debt this month after the mayor said Morgan Stanley (MS:US) couldn’t find buyers when interest rates were lower in June and July. The delay, during a period when local-debt yields reached the highest since 2011, means higher interest costs for the municipality of about 673,000 across the Rio Grande from Mexico, William Studer Jr., deputy city manager, said in an interview.
El Paso plans to use a higher hotel tax and general funds to help pay the debt. It joins localities from North Carolina to Oregon building sports venues to spur their economies. The ventures don’t always pan out, leading buyers to penalize the issuers. The city-formed development agency last week sold 25-year tax-exempt bonds to yield 5.95 percent, compared with about 5.05 percent on 30-year revenue debt with a similar rating, data compiled by Bloomberg show.
“It’s a lot of money they are having to pay out due to the risk involved,” said Lin Elliott, who oversees about $1 billion as investment manager at Texas Farm Bureau Mutual Insurance Co. in Waco. The bureau prefers holding bonds to maturity and wouldn’t buy debt for a minor-league franchise that may not last 30 years, he said.
Michael DuVally, a spokesman for New York-based Goldman Sachs, confirmed the change in underwriters and declined to comment further. Morgan Stanley had no comment, said Mary Claire Delaney, a spokeswoman in New York. Maria Urbina of First Southwest Co., El Paso’s financial adviser, didn’t respond to calls seeking comment.
The holdup in pricing the debt may have resulted from a jump in yields in the weeks before the first attempt to borrow, said David Jaderlund, who manages $500 million of bonds as president of Jaderlund Investments LLC in Santa Fe, New Mexico.
Since the end of May, yields on benchmark 30-year munis have climbed almost 1.5 percentage points to 4.75 percent, the highest since April 2011.
Investors yanked more than $27 billion from muni mutual funds in the 10 weeks from early May through mid-August, according to Municipal Market Advisors, a research firm in Concord, Massachusetts.
The withdrawals occurred amid speculation a growing economy will lead the Federal Reserve to curb its bond buying and as Detroit filed the biggest U.S. municipal bankruptcy in July. Detroit’s emergency manager, Kevyn Orr, sought to impose losses on some bondholders as part of a plan to avoid bankruptcy.
“This debt is subject to appropriation by the city council and that presented some discomfort on the part of some investors in light of Detroit,” said Studer, the deputy city manager.
The deal was also roiled by Fed Chairman Ben S. Bernanke’s May comments that the central bank may slow bond purchases, Studer said. Officials received authorization to sell the debt two days before those remarks, Studer said.
City Council on Aug. 2 approved interest rates as high as 6.5 percent for the tax-exempt debt and 7.25 percent for taxable bonds, up from 5 percent and 5.75 percent, respectively, in the offering that failed to sell.
“We hadn’t sold the bonds and it was time we needed to sell them,” Mayor Oscar Leeser said by telephone. He said he didn’t know why the offering failed in the first attempt.
“Because of the hiccups in the market, we lost out on a better interest rate,” said Councilman Larry Romero. He said the council wasn’t told why Goldman Sachs replaced Morgan Stanley.
The added cost over the life of the debt amounts to about 5 percent of the city’s general-fund budget for the fiscal year starting Sept. 1.
El Paso leveled city hall in April to create a downtown home for a team currently playing in Tucson, Arizona. The affiliate of the San Diego Padres will take up residence at the 9,000-seat ballpark in El Paso next year, under the city’s plan.
Investors demand higher yields from projects such as the El Paso stadium that don’t involve basic infrastructure and rely on hotel taxes, leases, fees and annual appropriations by politicians, said Rob Williams, income-planning director at Charles Schwab & Co.’s Center for Financial Research in San Francisco.
Repayment of the El Paso bonds hinges on a 2 percentage-point increase in a local hotel tax that voters passed in November. Revenue from the project, such as parking fees, ticket surcharges and team rent, will also be used.
Because receipts may fall short of what’s needed for debt service, the city expects to draw about $1 million in total from its general fund over six years, subject to annual approval, sale documents show.
“We don’t typically like appropriations-backed debt,” Williams said. “There’s been more than a few stories of a city backing an enterprise that runs into trouble and the city is less willing to appropriate payments.”
Harrison, New Jersey, lost its investment-grade status in 2011 after a $200 million venue for Major League Soccer’s Red Bulls failed to generate as much revenue and related activities as projected. Vadnais Heights, Minnesota, built a $25 million sports complex that didn’t meet financial expectations, prompting the city to default on debt payments this year.
El Paso is rated AA, Standard & Poor’s third-highest level. The ballpark bonds were graded a step lower at AA-.
Even as yields rose in the past few months, deals were getting done nationwide. About $52 billion in municipal securities were issued from June 1 to Aug. 2, according to Bloomberg data.
Other Texas cities and agencies haven’t delayed new issues in recent months, said Thomas Nolan, senior managing director of Estrada Hinojosa & Co., a Dallas-based investment bank. He is former chairman of the Municipal Advisory Council of Texas, an industry group in Austin that provides information on bond transactions.
“We’re not happy with the pricing levels, but we’re getting deals done,” said Garry Kimball, managing director of Specialized Public Finance Inc. in Austin, which advises Texas municipalities.
The stadium project has stirred controversy since local business leaders Paul Foster and Woody Hunt bought the team with plans to bring it to El Paso. Foster is chairman of Western Refining Inc. (WNR:US), with oil operations in Texas and New Mexico. Hunt is chairman of Hunt Companies Inc., which manages $16 billion in real estate, according to its website.
The city skipped a feasibility study and a public vote on tearing down city hall because Hunt and Foster said any delay might cost El Paso the team, Studer said in May. In mayoral elections in June, Leeser, owner of a car dealership, defeated former Councilman Steve Ortega, who had championed the project.
“The ballpark was a big part of the election,” Leeser said. “The voters wanted to be part of the decision and when they weren’t involved, they weren’t happy.”
In the market for Texas debt, Austin plans to sell tax-exempt bonds as soon as today, part of $4.7 billion issuers nationwide are offering this week, Bloomberg data show.
At 3.09 percent, yields on benchmark 10-year munis are close to the highest since April 2011, and compare with about 2.77 percent for similar-maturity Treasuries.
The ratio of the yields is about 112 percent, after reaching the highest since July 2012 this week. The greater the figure, the cheaper munis are relative to Treasuries.
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