Detroit's bankruptcy rattled the muni bond market when El Paso needed it most.
There isn’t much that links a low-lying Texas border town like El Paso to a former northern industrial hotbed like Detroit—that is, there wasn’t until very recently, when the 1,700 miles stretching between the two suddenly seemed too close to officials in the southwestern city.
When Detroit began its official spiral into bankruptcy, it rattled the municipal market at exactly the time El Paso was issuing revenue-backed bonds to finance a new minor league baseball stadium. City officials say they made the best of a bad situation and ended up increasing the interest rate on their bonds, which closed last week, to make them more appealing. But some say El Paso’s ambition – the city had already broken ground on the stadium, part of a massive, bonded downtown revitalization -- forced it into a must-sell transaction that cost the city more money than it should have.
To be sure, the 9,000-seat stadium project is one that has pitched along at nothing short of lightning speed by economic development standards. In June 2012, the city council approved the project and that November, voters approved $49 million in tax-exempt bonds to be paid for largely with a hotel tax increase and partially from the city’s capital budget. The stadium (which will also be paid for with an additional $12 million in taxable bonds paid for with stadium revenue) was to be built where the then-City Hall was located. Over a 90-day period this winter, the city government offices moved to a set of newly acquired buildings and in April, the former city hall was demolished to make way for the stadium. Now, 15 months after the council action, the stadium is under construction and slated to open in time for the 2014 baseball season.
Why the rush? Because, in a way, this city of 660,000 was already all-in. The Triple-A Tucson Padres agreed to the move only when the El Paso ownership group and the city guaranteed that a new ballpark would be open in time for the 2014 season. The ball club was still smarting from its disappointment in 2011 when California’s abolishment of redevelopment agencies killed a stadium project in Escondido, where the team had planned to move. So, when the council approved the new stadium for El Paso, it did so by guaranteeing that the city would use capital funds to pay for it if voters failed to approve bonds for the project.
“The council was prepared at the time to take the risk because they believed it was the single most important investment made in downtown in a very, very long time,” said City Manager Joyce Wilson.
And the gamble seemed to be paying off. Voters overwhelmingly approved not just the stadium but financing totaling $473 million for projects from parks expansions to infrastructure improvements to a new sports arena over the next decade that leaders hope will attract urbanites and young professionals. It was the single largest such bond approval in the city’s history.
As it intends to do with most of the bond projects, the city broke ground on the new stadium in April by fronting its own money with plans to issue the bonds for the project soon after. But then, in mid-June, Detroit defaulted on $18 billion in debt, on the way to declaring bankruptcy a month later. The following week, Fed Chairman Ben Bernanke said that U.S. growth was strong enough to slow bond purchases, prompting a spike in interest rates in the municipal market. El Paso offered its $63 million in revenue-backed stadium bonds the first week in July.
It was not good timing.
“It was sort of if anything could go wrong it did,” Wilson said. “Standard & Poor’s rated our [nontaxable bonds] double-A minus, which is pretty good. But when Detroit defaults on $18 billion subject-to-appropriation debt, all of a sudden everybody looks at the muni market a little differently.”
Faced with no takers, El Paso was forced to find another underwriter for the bonds and the council begrudgingly approved raising the interest rates on the offering. The limit was raised to 6.5 percent from the original 5 percent cap on the $48.7 million of tax-exempt debt, and to 7.25 percent from 5.75 percent for the $12.1 million taxable portion. The moves will cost the city an additional $17 million in debt repayments.
It was “the worst possible time to bring a speculative deal,” said Municipal Market Advisors analyst Matt Fabian, adding especially when the value of a minor league baseball stadium to El Paso is “questionable.” This summer, El Paso found a municipal market that had flipped 180 degrees from a seller’s market to a buyer’s market with little time to wait for a more favorable turnaround.
“You really never want that,” Fabian said. “You don’t want the issuer to be forced to sell – you never know what market conditions you’ll find and it was a very aggressive action on their part.”
Tamara Lowin, research director for Belle Haven Investments, agrees that El Paso found itself in somewhat of a bind at a time when other issuers were holding back on their offerings. “It became less flexible once they had to go to a second writer and postpone – their options became more limited,” she said.
But she said that’s not because the bonds themselves were un-enticing. She sees the city betting its money on the project before issuing the bonds as a positive. “As an investor you feel more comfortable with an authority issuer who is invested in the project,” she said.
Wilson said the city could have waited out the commotion and issued the bonds this fall but “it didn’t seem prudent to do so because predictions are that rates will continue to rise.” She added that, in her view, “our lead underwriter was not as effective as they could have been and took us out twice in early July with no success and then refused to purchase the bonds when they couldn’t culminate the sale.”
In any event, the complications have not tempered El Paso’s aggressive attitude as the city plans to issue more bonds at least twice this fall and again in the spring. It’s a lot of activity for an issuer that typically enters the market twice a year, according to Wilson. The fervor (there are about 60 projects currently in some stage of master design, planning or construction in El Paso) isn’t just to play catch up with other cities that hopped on the mixed-use, downtown revitalization band wagon a decade ago, Wilson said. It’s also good to keep those voters happy.
“We want to deliver quickly on even smaller projects so people start seeing them right away,” she said. “Because when you say it’s a 10-year plan and you don’t see anything for five years, people start getting restless.”