1
by CTION ON LEGISLATION, Budget Reconciliation, HR 4241, S *1932-, President Bush signed legislation Wednesday that reduces federal spending, $40 billion over five years., Among other things, the law included provisions that reform the deposit, insurance and student lending systems. The bill gives the Federal Deposit, Insurance Corp. broad authority to charge premiums, and raises the deposit, insurance limit for retirement accounts to $250, 000. Beginning in *2011-, also allows the FDIC to index the general $100, 000 coverage limit every, five, years to keep pace with inflation., Separately, the law cut millions of dollars in student loan subsidies, that the government pays lenders when interest rates are low. It also, reduces, the federal insurance on these loans by 1 percentage point, to 97% of the, loan., Terrorism Insurance, HR 4314, S 467, President Bush signed the Terrorism Risk Insurance Act on Dec. 22. The, bill keeps the government's terrorism insurance program in place through, *2007-, but narrows its scope considerably, so that insurers would have to cover a, larger share of claims., Under earlier law, the government had to pay claims of over $5 million., Under the new law, taxpayers' obligation kicks in on claims of over $50, million this year and over $100 million in 2007., PENDING LEGISLATION, Hurricane Relief, HR 4100, HR 3945 S *2172-, The White House and Rep. Richard Baker are continuing to fight over the, Louisiana Republican's bill to create a government agency to buy and, redevelop property damaged by the Gulf Coast hurricanes., Rep. Baker announced Jan. 30 that the White House opposes the bill. Don, Powell, the former Federal Deposit Insurance Corp. chairman who is leading, the Bush administration's rebuilding effort, said the legislation would, create an unnecessary level of federal bureaucracy. The White House, instead, has been promoting $6.2 billion in community development grants to, Louisiana, that could be used to rebuild homes., The banking industry largely backed the Baker plan because it would, ensure local banks do not have to foreclose on homes with little or no, value., Most state officials also supported the bill, and Rep. Baker has continued, argue it could still be passed., Rep. Baker introduced the bill Oct. 20, and it was approved 50 to 9 by, the House Financial Services Committee in December., Sen. Mary Landrieu, D-La., introduced a companion bill on Dec. 21. The, Senate Banking Committee plans to hold a hearing Feb. 15 on this plan and, others to help rebuild the Gulf Coast area., Rep. Baker also sponsored the Hurricane Katrina Financial Services Relief, which passed the House 411 to 0 on Oct. 27. The bill would direct, regulators to give the 216 banks and credit unions in the affected areas, forbearance from prompt-corrective-action requirements if they become, undercapitalized in the next 18 months as a result of the storm., The bill also would provide regulatory flexibility for institutions that, experience temporary growth as victims deposit insurance and government, assistance checks. It would waive the Federal Reserve System's fees for, wire, transfer services for six months. A similar bill has not been introduced in, the Senate., On Oct. 27 the House Financial Services Committee approved by voice vote, a bill from Rep. Ginny Brown-Waite, R-Fla., that would cover bank losses, from, bad checks cashed by hurricane victims. The government would indemnify, banks, and credit unions for cashing checks for evacuees who do not have proper, identification., Sens. Landrieu and David Vitter introduced a broad hurricane-relief bill, Sept. 22 that includes a section intended to encourage banks to cash checks, for victims, defer and restructure loan payments, and waive Fed fees for, wire, transfers and other services. The bill is still pending in the Senate, Finance, Committee., Flood Insurance, S *1936-, The White House and Senate Banking Committee leaders have pledged to, revamp the flood insurance program this year. The review was prompted, because, the program is expected to go $23 billion into debt to repay claims from, recent Gulf Coast hurricanes., It's broke, it's not working, and we have some real work to do, Sen., Richard C. Shelby said after the first of two hearings held so far looking, into the issue., The White House budget, released Feb. 6, working with Congress to reform the program to further mitigate the impact, The budget said the administration is looking to lenders to ensure that, consumers in designated floodplain areas obtain flood insurance, and that, would seek to phase out subsidized premiums granted to roughly a quarter of, participants in the program., Such subsidies were the focus of the Senate Banking Committee's first, hearing on the subject on Jan. 25. Sen. Shelby also raised concerns that, program covered vacation homes, and houses that have repeatedly been, flooded., Industry representatives testifying at a second hearing Feb. 2 urged, Congress to be careful in revamping the program. Regina Lowrie, chairwoman of the Mortgage Bankers Association said that expanding, requirements for lenders under the program could increase homeownership, costs., Sen. Trent Lott introduced a bill Oct. 27 that would create a temporary, flood insurance buy-in program for Gulf Coast hurricane victims. It would, allow the director of the Federal Emergency Management Agency to include, homes damaged by Hurricane Katrina and Rita in this program. Contents of, homes, however, would not be covered. The bill would only apply to homes, that, were outside the areas where flood insurance was mandatory., House Democrats introduced a bill Sept. 27 that would let victims of, hurricanes Katrina and Rita buy flood insurance retroactively. The measure, targets property owners who were not subject to the national insurance, program's mandatory purchase requirements. The bill is opposed by the Bush, administration., Data Security, S 1789, HR 3997, HR 4127, S *1408-, Senate Banking Committee Chairman Richard Shelby said Jan. 31 that one of, his key priorities this year is legislation to require companies to take, steps, to guard information and notify consumers of a security breach. He said, staff continues to work on a bill, but that one challenge is ensuring any, standard would keep up with emerging technology., In a speech Feb. 2, Comptroller of the Currency John Dugan recommended, that Congress ensure that any new standard would preempt current state, laws., He also said lawmakers must ensure that a new standard does not conflict, with, current requirements on financial institutions put in place by the, Gramm-Leach-Bliley Act of 1999., Other committees are also debating data security legislation., The Senate Judiciary Committee approved by unanimous consent Nov. 17 a, far-reaching data security bill sponsored by Chairman Arlen Specter, R-Pa., The bill would require companies that hold data on individuals to keep it, significant risk of, The bill would set new criminal penalties and increase current ones, for violations. It would let states pass laws in areas of data security it, does not specifically cover, and it would let state authorities enforce the, federal law., The House Financial Services Committee held a hearing Nov. 9 on an, industry-backed data security bill that would preempt conflicting state, laws., It would let financial services companies operate under rules slightly, tighter than the ones with which they currently comply. Committee leaders, announced at the hearing that they would not schedule a vote on the bill, sponsored by Rep. Steven LaTourette, R-Ohio, until this month at the, earliest., The House Energy and Commerce consumer protection subcommittee voted 13, to 8 on Nov. 3 to approve the Data Accountability and Trust Act. The full, committee is expected to vote on it next week., The bill, sponsored by Rep. Cliff Stearns, R-Fla., would require, companies that handle sensitive consumer data to secure it and notify, victims, of breaches., Notification would be required if the company determined there is a, to conclude there is a risk of identity theft., The subcommittee amended the bill to also require notice if the victim is, in danger of transaction fraud or other unlawful conduct., Consumers would not have to be notified if the lost information had been, encrypted., The Senate Commerce Committee unanimously approved a data security bill, July 28., GSEs, S 190, HR *1461-, The White House reiterated in its latest budget a call to approve a bill, to create a new regulator for Fannie Mae, Freddie Mac, and the Federal Home, Loan banks., The budget argued a new regulator must have unfettered power to limit the, massive mortgage portfolios of Fannie and Freddie, arguing they are a risk, the U.S. economy. It dismissed GSE arguments that the portfolios further, Sen. Shelby said Jan. 31 he remains committed to winning Senate approval, of his bill to create a new regulator. It was approved July 28 by a, party-line vote of 11 to 9, but has been stalled since., The Alabama Republican said the main sticking point with Democrats, remains a provision that would require a new regulator to limit the, mortgage, portfolios to only what is needed to complete their mission. Sen. Shelby, said he expected to break the logjam this year, but he did not say how he, would do so., The House voted 331 to 90 on Oct. 26 to approve its own reform bill., The legislation, sponsored by Rep. Baker would allow but not mandate the, new regulator -- the Federal Housing Finance Agency -- to limit any asset, liability of the government-sponsored enterprises., The regulator would have the authority to raise minimum and risk-based, capital requirements and put the GSEs into receivership., The Bush administration said the bill does not meet its minimum, requirements for reform, saying its portfolio provision is not strong, enough, before the vote it issued an official Statement of Administration Policy, that, the legislation., Rep. Baker has argued that his legislation does meet the administration's, requirements for reform, including requiring the new regulator to address, management of the GSEs' investment portfolio and mandating a study on its, risks to the companies and systemically.
Published in American Banker (2006)
Get additional information online
E-Article
2
by Ben JacksonBank Mutual Corp.'s plans for improving its lackluster earnings include making more commercial loans and selling more fee services to baby boomers., One analyst, however, and Bank Mutual had its third anniversary as a public company Sunday., The $3.5 billion-asset Bank Mutual reported third-quarter earnings of $5.1 million, down 26% from a year earlier. It had similar declines in the three previous quarters., Michael T. Crowley Jr., Bank Mutual's chairman, president, and chief executive officer, blamed its earnings woes on market conditions -- including competition for loans and deposits -- and on interest rates., In the nine months that ended Sept. 30, Bank Mutual originated $41 million of commercial real estate loans, 12.2% less than in the first three quarters of 2005. Commercial business loans were flat at $32 million, and total loan originations in the nine months fell 15.5% year over year, to $430 million., Bank Mutual has hired four commercial lenders in the past year, but Mr. Crowley said it has been difficult to add more because good ones are hard to find. Moreover, We are taking our time in bringing new credits on so we don't have credit quality issues down the road, To raise fee income, Bank Mutual is aggressively marketing its debit card program and building a retirement planning business in its insurance subsidiary, BancMutual Financial and Insurance. It is trying to cross-sell those services to baby boomers, especially those nearing retirement age who have pensions and other large retirement savings that need to be managed, Mr. Crowley said., It is also training its younger employees in how best to talk with older customers to identify what products and services they want., Whether all of this will lead to long-term independence is hard to tell, said Ronald J. Peterson, an analyst with Sterne, Agee & Leach Inc. in Chicago., Though Bank Mutual's earnings have been down, Mr. Peterson said, Everyone is facing the same challenges, But Kevin K. Reevey, an analyst at BankAtlantic Bancorp Inc.'s Ryan Beck & Co. Inc. in New York, said he thinks a sale of Bank Mutual in the near future is likely, in part because of the difficulty it has had bulking up in commercial lending., The fact that it has branches in some of Wisconsin's most desirable markets would make it appealing to buyers, Mr. Reevey said. He also pointed out that Mr. Crowley owns about 3% of Bank Mutual's shares, Mr. Crowley said he has been hearing rumors about Bank Mutual's possible sale for at least six months, but he would not comment on them., Bank Mutual's stock hit a 52-week high of $12.76 on Sept. 21. It closed up 1.33% Monday
Published in American Banker (2006)
Get additional information online
E-Article
3
by David BreitkopfAfter spinning off Western Union Financial Services Inc. next week, First Data Corp. expects to generate revenue of $7 billion this year, and long-term gains of 8% to 10% per year in both revenue and earnings, executives said Wednesday., In a meeting with investors and analysts in New York, the Denver company detailed its post-breakup organization and financial structure. It plans to spin off the money transfer company Sept. 29., First Data also unveiled a major customer win Wednesday. Pam Patsley, the president of First Data International, announced a long-term agreement to process credit cards and loans for Barclays Bank PLC., The British banking giant will shift its U.K. Barclaycard co-branded portfolio to First Data's VisionPlus processing platform, and the deal could eventually expand to include Barclays' accounts in other European countries, Asia, and South Africa, The processor had already discussed much of its new structure since announcing the breakup plan in January, but it disclosed several key financial details at Wednesday's meeting. After Western Union becomes independent, First Data will have three divisions. The international unit is the smallest, and is expected to post revenue of $1.2 billion this year. The commercial services division will bring in about $4 billion, and the financial institution services division will generate $1.8 billion. The international division is the fastest-growing, as evidenced by the Barclays deal, and its top line is expected to have 24%-27% growth this year., First Data reported total revenue of $2.9 billion in the second quarter., I think we're very much headed in the right direction, and would not change much, said Henry C. Duques, First Data's chairman and chief executive., In July, First Data said it planned to shift much of its debt to Western Union, a move analysts said would give First Data more financial freedom to pursue growth after losing a significant revenue source., After the spinoff, First Data will be left with $4.6 billion in debt, but Kim Patmore, its chief financial officer, that debt to $2.1 billion. Western Union, post-breakup, will have $3.5 billion in debt., like to do business with companies with higher ratings, Mr. Wheeler said., Lawrence S. Berlin, an analyst for First Analysis Securities, at its business segments, for analysts, investors, and customers., If you clarify your services, your products, to your customers, eventually it will show up, and the investors will be happy, Mr. Berlin said., Some analysts seemed disappointed during the meeting that First Data does not expect higher revenue growth. Mr. Berlin, however, said he was not surprised by the anticipated gains of 8% to 10%., It's a good company growing nicely, but it's not a rapidly growing company, though if its international business takes off, overall growth could also pick up by the end of the decade
Published in American Banker (2006)
Get additional information online
E-Article
4
by Bill StonemanStarting in the next few months people will be able to cash checks written on their Palm Desert National Bank accounts at kiosks outside three of its branches., Palm Desert then plans to place kiosks that will let consumers transfer funds from one card to another and handle international wire transfers in other locations around town, said Sandra Hartfield, the president and chief executive of its electronic banking division. It is also considering offering check cashing to nonbank customers., Ms. Hartfield said., Experts don't go that far but say the technology gives banks a good opportunity to make customers of the unbanked and the underbanked and to get more fee revenue from customers they already have., Retailers, especially convenience store chains, appear to be well ahead of banks in making a commitment to self-service financial devices. 7-Eleven Inc. has about 1, 000 Vcom terminals in its stores, offering bill payment and check cashing. About 800 retailers are offering bill-payment services provided by Tio Networks Corp. of Burnaby, British Columbia, and some of those convenience stores offer other vendors' check-cashing services at the same location., Many more Tio installations are on the way. Exxon Mobil had 130 bill-paying terminals operating in August and plans to roll out nearly 1, 000 by the end of 2007 in convenience stores at gas stations it owns. Tio Networks expects to have as many as 10, 000 terminals deployed in the next five years., The involvement of banks such as Palm Desert in the convenience stores' offering of financial services is mainly behind the scenes, processing transactions for other companies., Citigroup Inc. announced a deal in April to put its name on more than 5, and it did not return calls for this article., Observers interviewed for this article said Palm Desert was the only bank they knew of that was providing this level of self-service capability on its own., Tulsa National Bancshares offers self-service bill payment through ChoicePay, which provides electronic bill-payment services and owns bill- payment kiosks in five Tulsa supermarkets. The $178 million-asset Tulsa National owns 93% of ChoicePay., Though it remains to be seen whether financial kiosks will make money, banks that do not invest in them could miss a chance in the unbanked, underbanked market and lose business to retailers., said H. Leon Majors 3rd, the president of ESP Consulting Group in Salisbury, Self-service transactions could include preparing money orders, topping off stored-value cards, and transferring value from card to card. Two transaction types, however, are central to most discussions about this business: bill payment and check cashing., Tio machines in Exxon Mobil, Circle K, and other convenience stores can spare the unbanked a trip to their utility company's office to pay a bill or buy a money order. Users can load cash and checks into the machines, said Hamed Shawbazi, Tio's chairman, and president., Vero Inc. of Portland, Ore., is among the handful of companies offering a check-cashing system. Enrollment, whether at a convenience store or a bank, requires one-time verification before the applicant is issued a user card, said David G. Grano, the president of the Portland, Ore., company., Automated bill payment and check cashing will attract bank customers as well, Ms. Hartfield said. Palm Desert plans to replace its regular ATMs with kiosks that will offer bill payment and check cashing to its customers and to the unbanked., Ms. Hartfield said., Mr. Majors said that by offering these types of services, Tio Networks has relationships with about 15 large billers, Many banked people are seeking a check-cashing solution on a Friday afternoon, the people cashing their paychecks, and people with other banking to do at the teller line., Businesses that primarily serve the unbanked - payday lenders, money transfer agents, pawn lenders, sellers of prepaid products, check cashers, coin-counting services, and billers accepting walk-in payments - had revenue of $12 billion in *2004-, according a report on kiosks published this year by Aite Group LLC., Unbanked people are very accustomed to paying a fee for paying a bill or cashing a check, said Glen Fossella, a vice president and the head of marketing for Source Technologies LLP, a Charlotte check printing software company expanding into kiosk software. Whether provided by banks or convenience stores, self-service devices tend to offer better prices than check-cashing stores, now have the opportunity to offer other services to these unbanked folks, But it could be risky for banks to charge as much as even convenience stores do for the same bill-payment and check-cashing services. Consumer advocates would be quick to call that predatory, Mr. Majors said., Mr. Shawbazi said 287, 000 bill-payment transactions were made through Tio in July. Greg Adelson, the president and chief operating officer of Choice Pay, said his company's supermarket kiosks are racking up more than 1, 500 bill- payment transactions a month, charging $1.50 to $3 per payment., Right now Palm Desert has a much bigger stake in the back end of the kiosk business. The bank, which has a national business providing cash services to ATMs, handles the actual biller payments for Tio Networks, expects to support Vero's check-cashing business, and would offer support services to other small banks that want to set up kiosks at their branches, Ms. Hartfield said., Tulsa National has a different approach, said Roger Marshall, its chairman, Mr. Stoneman is a freelance writer in Albany, N.Y.
Published in American Banker (2006)
Get additional information online
E-Article
5
by Craig T. FerrisThe Senate cleared the way for negotiators to be named by the House and, Senate - possibly this week - to hammer out a compromise, tax-reconciliation package after the upper chamber easily approved a, revamped $70 billion tax reconciliation package late Thursday night that, includes an expanded provision to extend the qualified zone academy bond, program through the end of 2007., The measure, approved on a 66-31 vote, contains a bipartisan package of, amendments that would extend a number of popular tax measures for two, years, including QZABs, while retaining the elements of the original bill, passed by the Senate on Nov. 18 that includes several municipal, bond-related provisions., The Senate vote cleared the way for both chambers to take the steps needed, to name members of a conference committee to hammer out significant, differences in the two bills, especially a House provision that would, extend President Bush's tax cuts for capital gains and dividends., The so-called substitute amendment, proposed by Senate Finance Committee, chairman Charles E. Grassley, R-Iowa, and the top Democrat on the panel, Sen. Max Baucus of Montana, would extend the $400 million-a-year QZAB, program that expired at the end of 2005 through 2007., Both the original $57.8 billion Senate and $56.1 billion House tax, reconciliation bills that were approved before Congress recessed late last, year called for extending the QZAB program only for one year. The Senate, bill also calls for a number of restrictions on QZABs that are not in the, House bill, including provisions that would be effective for bonds issued, after Dec. 31, *2005-, governing payment of principal, the spend down of, proceeds, and redemption requirements., The proposed two-year extension of QZABs and more than a dozen other, expiring tax breaks such as giving taxpayers the option to deduct state, and local taxes was made possible when almost $20 billion of added room, was opened up in the Senate bill after the House passed its separate, budget reconciliation measure Wednesday and after Congress late last year, passed substantial tax incentives for rebuilding the Gulf Coast in the, wake of Hurricane Katrina that were dropped from the Senate tax measure., Now that the Senate has acted on the House bill and replaced it with an, amended version of its own measure, the House will have to take up the, Senate's new version - possibly this week - and approve a motion to go to, conference with the Senate and name its representatives on the panel. Then, the Senate would also approve a similar motion and name its conferees., Republican leaders hope an agreement on a final tax reconciliation package, can be hammered out before both houses adopt a fiscal 2007 budget, resolution this spring. Otherwise, the special budget rules that protect, the tax bill from filibuster would expire., In addition to the expanded QZAB extension, the Senate bill still contains, proposals included last fall that would impose new restrictions on pooled, bond issuance, require broker-dealers and other financial intermediaries, to report to the Internal Revenue Service all tax-exempt interest paid to, investors and speed up the effective date for the increase in the capital, expenditure limitation in conjunction with small-issue industrial, development bonds to Dec. 31, *2006-, from the Sept. 30, 2009 effective date, that was enacted in 2004., Except for a one-year extension of QZABS, none of the other municipal, bond-related measures were included in the pending House bill., The negotiations over a final tax package are expected to be difficult, because of major differences between the House and Senate bills. The House, measure contains a proposed two-year extension through 2010 of the cut in, tax rates on capital gains and dividends. Those lower rates are now, scheduled to expire at the end of 2008. However, the Senate bill would not, extend those popular investor tax breaks., But the Senate bill does include a provision to extend through the end of, 2006 the relief granted to taxpayers from the alternative minimum tax, measure enacted as part of the Tax Reform Act of 1986 that was designed to, make sure that wealthy taxpayers did not escape paying some taxes. Due to, inflation, however, the AMT is ensnaring an increasing number of, middle-income taxpayers each year, especially from high-tax states such as, New York., The House bill does not contain a similar AMT relief provision because the, House in December passed a separate AMT bill that the Senate has not, considered.
Published in Bond Buyer (2006)
Get additional information online
E-Article
6
by Humberto SanchezA burgeoning trend kicked off when private foreign firms started leasing, toll roads from state and local governments around the nation has sent U.S., transportation infrastructure finance players scrambling -- including, funneling billions of dollars into infrastructure investment funds and, rethinking their traditional roles -- to get a piece of the action., It all started with the Chicago Skyway, which was leased for 99 years by, the city of Chicago to a consortium led by Australia-based Macquarie, Infrastructure Group and Spain-based Cintra Concesiones de Infraestructuras, de Transporte SA. The deal closed in January 2005., The 7.8-mile toll road was built in 1958 and connects the Dan Ryan, Expressway on the west end to the Indiana Toll Road on the east end., Under the deal, Chicago received a $1.83 billion cash payment from the, Cintra-Macquarie group, which took over operation and maintenance of the, road, and keeps the toll revenue collected through 2104. The deal allows the, private, group to raise the tolls on a schedule negotiated with the city. Tolls for, passenger cars are capped at $2.50 until 2008 and rise incrementally to, $5.00, starting in 2017., This transaction between the consortium and Chicago was the first, privatization of an existing toll road anywhere in the United States., Most recently, the same pair of companies is close to closing a deal with, Indiana on a 75-year lease deal for its toll road, a 157-mile highway that, runs east to west along the state's northern boarder, in exchange for a, $3.8, billion upfront payment., While it is too early to declare that the nation is in a new era of, transportation infrastructure finance, several traditional transportation, finance firms are betting that if we aren't yet, we ultimately will be., Many companies, including investment banks Goldman, Sachs & Co., JPMorgan, Chase & Co., Morgan Stanley, as well as the giant construction and, engineering, firm Parsons, are actively seeking out concession deals, and Macquarie is, exploring the possibility of leasing U.S. airports, according to recent, interviews with company officials and representatives., Their interest also comes as the Virginia Department of Transportation, last month agreed in principle to a 99-year concession deal -- including, operations, maintenance, and collection of toll revenue -- with Transurban, Ltd., an Australia-based toll road operator, for the Richmond-area, Pocahontas, Parkway. Under the deal Transurban would pay VDOT $525 million., Traditionally states and localities have relied on federal, state, local gas taxes vehicle fees and other revenues, along with municipal bonds, to finance transportation infrastructure. But those sources have not kept, pace with the nation's growing infrastructure needs., THIRD FINANCING OPTION, The private sector capital now interested in public infrastructure, that should be considered as part of any, said Mark Florian, chief operating officer of Goldman's, municipal finance and infrastructure group., The gist of this business really grew up out of need, in places such as, Europe and Australia, and other parts of the world where there is not a, big,, Governments needed to build, projects,, but didn't necessarily have access to the very liquid municipal bond market, that we have in the United States. What they would do is ask the private, sector to come in and build facilities and give the private sector the, ability to collect revenue as an enticement to get them to build it in the, Following the Macquarie-Cintra group's execution of the Skyway concession, in January *2005-, Goldman reorganized its municipal finance group in March, 2006. As part of the reorganization, Tracy Wolstencroft was brought in to, head the group from Goldman's corporate investment banking team., The reorganization at Goldman Sachs took place with a couple of things, One is to grow our existing, municipal, finance business, which is a debt and derivatives business. The second is, is really about growing the existing business and as well, Henry M. Paulson Jr., Goldman's chairman and chief executive, very, of the change towards moving into the private concession, sector,, according to Florian. Paulson was nominated late last month by President, Bush, to become Treasury secretary., Florian does not believe that there are any tax rules or regulations that, Paulson could change in order to help the private concession market grow., The federal government has been relatively accommodating to date -- this, There is nothing that the, A sign of the administration's general support came last month when, Transportation Secretary Norman Y. Mineta spoke before opening the day's, trading at the Nasdaq stock exchange. He urged investment and engineering, firms to lead the privatization charge., The time is now for United States investors -- including our financial, construction, and engineering institutions -- to get involved in, Their involvement will be, crucial, if we ever hope to have the funds necessary to build the transportation, network required by our rapidly growing economy. Private capital will give, those communities willing to embrace it an opportunity to augment public, Florian did, however, point out that loosening tolling restrictions on, the Interstate highway system would be beneficial to expanding the public, infrastructure privatization market., One initiative local governments could take that might attract private, investment is to build new high-occupancy toll lanes on existing free, roads,, he suggested. HOT lanes, which are actively being planned in Virginia, Maryland, and other states, would increase capacity on the road and, relieve congestion, while leaving a drive-for-free option., RAISING CAPITAL, Meanwhile, Goldman Sachs, the Carlyle Group, a private equity firm, other investment companies are putting together funds -- Goldman's is, estimated to be worth about $3 billion and Carlyle's roughly $1 billion --, that are designed to acquire transportation infrastructure assets around, nation, according to published reports., In March, around the same time as the Goldman reorganization, Carlyle, announced that it established a team to conduct investments in the, infrastructure sector., Carlyle's Infrastructure team will invest primarily in U.S., infrastructure in transactions ranging from $100 million to more than $1, The team will engage in, public-private, partnerships with governments at all levels as well as purchase projects, Morgan Stanley is putting together an infrastructure fund, which is part, of its asset management business, firm officials said in an interview. But, they did not provide any other details citing restrictions during fund, raising., Their interest in privatization comes as the firms increasingly see, municipalities look to corporate finance frameworks to solve public finance, problems, according to Robert Collins, a Chicago-based Morgan Stanley, executive director who heads the mergers and acquisition group., We are having dialogues with those clients that have underfunded pension, plans or vast budget deficits to explore unlocking any latent equity value, These kinds of dialogues have been, The firm is exploring private deals for both existing infrastructure, sometimes referred to a brownfields, and to build new infrastructure, known, as greenfields., We are looking at both sides of it, the greenfield and the brownfield, we are looking at working with municipal entities to advise them on all, said Eugene Devlin, a Morgan, Stanley, managing director and head of the firms public finance department., Devlin also noted that he was skeptical that the privatization trend, I think, this will supplement the projects that would not normally get done, said., Banks are typically raising dollars primarily from foreign pension funds, and insurance companies, which are seeking investments that yield more than, municipal bonds, but are not as volatile as stocks and equities., These types of investments make a lot of sense for pension funds because, a lot of these pension funds have very long liabilities where they are, going, to be paying out a lot of money for the next 30, 50 years, said one, For them to have a long duration asset that is generating cash, flow, that is pretty steady cash flow over a long period of time is perfect. It, is a, A lot of insurance companies have investment pools that last for a long, They have reserves they need to, The recent influx of available capital is coming from nations like, Australia, where Macquarie and TransUrban are based. Australia introduced, compulsory pensions 15 years ago., The Australians have an awful lot of pension money to put to work and, they are looking for stable long-term investments that produce stable, returns, said Michael C., Finnegan, a, managing director with JPMorgan., JPMorgan is building a fund, but Finnegan did not have any other details, about it. He noted that the bank's leaders keep Finnegan's group -- which, advises state and local governments on concession deals -- separate from, side of the business that raises private dollars., With capital in hand, the investment firms are actively seeking out, concession projects., For example, Goldman is currently working on several concession projects, including seven Texas greenfield toll road facilities., JPMorgan has submitted a study to Harris County, which includes Houston, that explores a sale of its extensive toll network. The county is, considering, other financing studies and deciding what avenues to pursue., Also in Texas, two groups of private firms last week submitted proposals, to finance the extension of Interstate 69 through the state. Each one of, groups includes one of the two firms that worked together on the Chicago, Indiana deals., Morgan Stanley is part of a consortium led by Spain-based FCC, Construccion S.A. that is bidding to design, build operate and finance a, tunnel that will improve access to the Port of Miami. The other two bidders, include a group led by French firm Bouygues Travaux Publics, of which ABN, AMRO Bank NV is a partner, and a team led by Spanish firm Dragados, Concesiones de Infraestructuras SA., Under the proposed deal, the Florida Department of Transportation, once, the tunnel is built, would pay the winning team an annual payment over 35, years, instead of requiring drivers to pay a toll when using the tunnel., would be reduced by, number of hours that lanes are closed or the tunnel does not meet, negotiated, operating requirements. The technique has been used primarily in Europe., PARSONS, Parsons is traditionally known as an engineering, design, construction firm, as the privatization of the public infrastructure, sector has appeared on the horizon, they too intend to branch out from, project design, development, and delivery., We are trying to stay current with new approaches to financing and, said Jeff Squires, a vice president with, Parsons., At this stage we are starting to talk to concessionaires about being a, full, partner, not just in the delivery of the project, but also in the long-term, Squires -- a former aide to Sen. Jim Jeffords, I-Vt., on the Senate, Environment and Public Works Committee and the Senate Finance Committee --, stressed that discussions are still in their early stages. He also did not, specify what firms are involved or what projects were being considered., beyond project, as we expand the nature of our, participation,, As an example of the firm's interest in the growing business, Squires, pointed out that Parsons is part of a consortium building the Kicking Horse, Canyon project in British Columbia., The project involves phase two of the construction of the Kicking Horse, Canyon roadway and bridge, and a 25-year concession for the operation, maintenance and rehabilitation of approximately 26 kilometers of the, Trans-Canada Highway between the Highway 95 intersection in Golden, British, Columbia, and the western boundary of Yoho National Park., Squires noted that while foreign firms currently are the leaders private, I think there are a lot of familiar domestic [firms], that, He pointed out that the established foreign firms have an advantage, because they have a portfolio of assets that allows them to mitigate risk, associated with taking on these deals., Each of these projects has a different performance curve with different, points in time that are expected to yield different outcomes and if you, can blend that it helps you to advance more comfortably, Squires said., RISK OF REGULATION, Efforts by Congress to limit how states or cities could spend private, concession dollars or protect consumers from unreasonable toll increase, schedules could also pose risks for the fledgling business, sources said., Sources said that Democrats on the House Transportation and, Infrastructure Committee have been meeting with experts, but that it is, unclear if the lawmakers will draft or introduce legislation that would, regulate infrastructure privatization., At a hearing last month on private transportation infrastructure, financing before the committee's highway subcommittee, Rep. Peter DeFazio, D-Ore., raised concerns over allowing private firms to profit from the use, public infrastructure., During the hearing, Gov. Mitch Daniels, who appeared before the panel, said that tolls on the Indiana Toll Road, which is run by the state, been raised since *1985-, in part because no Indiana politicians wanted to, back, such a politically unpopular move., DeFazio argued that by leasing the Indiana Toll Road, Daniels was, to raise tolls to the private sector., In response, Daniels stressed that the $3.8 billion Indiana Toll Road, concession deal would allow the state to finance nearly $5 billion of other, badly needed road projects that it could not have done otherwise. The $5, billion figure includes the $3.8 billion upfront payment plus $900 million, interest the state expects to earn., Opponents to the toll road deal last week argued before the state Supreme, Court that the planned use of proceeds from the lease is unconstitutional, that the money should instead be used to pay off debt. A lower state court, recently ruled that under state law the opponents would have to post a $1.9, billion bond in order to pursue the case on its merits. The lease deal is, expected to close by June 30., More recently, another observer raised the possibility that congressional, partisan divisiveness could also rear its head in conjunction with, privately, financed greenfield projects because those projects would not have, requirements that come with using federal dollars, for example, compliance, with the Davis-Bacon Act requirements on prevailing wages., I think that the ability to do major projects without federal funding, could represents a concern in some quarters that maybe some of the, protections that are built into the federal program would be absent, As I listen to the early discussions I think it portends, Davis-Bacon is a Depression-era labor law that requires payment of, prevailing wages on projects financed with federal funds., The issue is controversial in Congress and often pits labor against, management and the interests of Northern and Northeastern states, which, have, a heavily unionized labor forces, against Southern and Western states, where unions are not as entrenched., MACQUARIE EYES U.S. AIRPORTS, Macquarie manages a $24 billion investment portfolio, which includes, investments in more than 90 infrastructure facilities in more than 20, countries. The firm specializes in different types of infrastructure, including toll roads, airports and airport-related assets,, telecommunications, water, rail, port, energy generation, transmission and, distribution assets, as well as water and wastewater., Given the scope of the types of infrastructure that have been privatized, around the world, some are looking to expand the phenomenon in this country, beyond toll roads., everyone is starting to look at power generation assets,, health care assets, surplus real estate, JPMorgan's Finnegan said., One area that the Macquarie hopes to develop in the U.S. is airport, privatization, according to John Cline, a lobbyist with C2 Group, which, represents the firm., Macquarie believes that now is the right time to explore that avenue, because the Vision 100--Century of Aviation Reauthorization Act expires at, the end of fiscal 2007. Debate on renewing the law, which governs the, Federal, Aviation Administration and authorizes funding for its programs, expected, to intensify as lawmakers focus on the issue next year., Cline said that the hurdles are higher for airport privatization than for, highways. He cites language in current law that mandates that revenues, generated from an airport have to be used on the airport. While a few, airports have deals with private operators to run their facilities, such as, Indianapolis International Airport with airport firm BAA, the language in, current law prevents private firms from owning or leasing U.S. airports on, It makes it very difficult for a private entity to come in, earn a profit, and not be able to take the money off of the airport, However, the firm sees an opportunity because airport infrastructure is, crumbling and traditional financing sources -- federal dollars and bonds --, will not be adequate to make the needed improvements., The landscape is also changing on the airport side, there are, insufficient resources for the capital investment that is needed, both for, airport runway redesign and additions, as well as terminal developments, [The FAA wants] to move from a, ground-based radar system to a satellite-based system, which is a $10, billion, to $15 billion investment. There are lots of investments in the aviation, world, Cline said that Macquarie, which owns shares in airports in Copenhagen, Rome, Sydney, and Brussels, is well-positioned to privatize U.S. airports., The lobbyist said discussions with lawmakers and the U.S. Department of, Transportation about the issue are underway., One issue that has concerned some public airport operators and airlines, over the prospect, according to Cline, is that cities would use the funds, they make from a long-term lease deal to pay for pension or post-pension, costs at the expense of growing airport and other transportation-related, needs., But restricting the use of proceeds from a concession deal to, reinvestment in infrastructure could alleviate the issue. Along with, seeking, airport deregulation, Macquarie plans to continue to seek out concessions, highways, Cline said., Certainly this [privatization movement] cannot be depicted yet as a, infrastructure projects are going forward as publicly financed traditional, But there is no doubt that with the Skyway and the Indiana toll road, transactions there are people out looking at all sort of deals, Cline, said.
Published in Bond Buyer (2006)
Get additional information online
E-Article
7
by William Curran & Michael ScarchilliThe municipal bond market was little changed yesterday, and trading, activity was light, as economic data was mixed and investors were, reluctant to put money to work with the potentially market-moving release, of April non-farm payrolls looming today., The muni market continues to be sloppy. We continue to not have a lot of, a trader in New York, Right now a lot of people are just waiting for tomorrow's number. I, think there are still traders out there that have positions they'd like to, move if they could, but you really can't put anything out and test it out, because the cheap bid is not there. It's sort of a game of move the deck, Activity by event-risk-wary institutional investors was limited, but some, retail investors nibbled at bonds made attractive by the recent sell-off, traders reported., There is some retail activity going on. Things have gotten cheaper on the, long end, so we've been able to sell longer retail paper, which we hadn't, been able to do until recently. In the first seven or eight years, however, no one is cheapening their offerings because there is so little, another trader in New York said., After weakening at the open, the Treasury market climbed back to the, unchanged mark, with the yield on the 10-year note flat at 5.15%. Economic, data released yesterday morning was mixed, as a weekly labor market, indicator showed some softness, but a separate report showed a jump in, unit labor costs., First-time applications for state unemployment benefits rose 5, 000 to a, seasonally adjusted 322, 000 in the week ended April 29, according to the, Labor Department. Economists surveyed by IFR Markets predicted 310, claims. The four-week moving average, a less volatile measure of, unemployment, was 314, an increase of 5, 250 from the previous week's, revised average of 309,000., Overshadowing the bond-friendly claims data, however, was a report that, showed a surge in labor costs, a sign of building inflationary pressure., The Bureau of Labor Statistics reported that unit labor costs increased, 2.5% and productivity jumped 3.2% in the first quarter, according to, preliminary statistics. IFR's poll predicted a 1.3% increase in unit labor, costs., Dean Maki, chief U.S. economist at Barclays Capital, said he did not, expect the unanticipated increase in first-quarter labor costs to weigh, heavily on the Federal Open Market Committee's interest rate, considerations., I don't think they'll find this report particularly alarming, On a year-on-year basis, The labor data released could be evidence that economic growth is cooling, as the recovery matures., Jobless claims did jump a little bit on the week, which by itself is not, alarming, but it is a change in trend from what we've seen over the last, It would be consistent with the idea that, Investors at 8:30 a.m. Eastern time today will wrestle with more closely, watched labor market data, the non-farm payrolls report. Economists polled, IFR have forecast that the economy created 200, 000 jobs in April and, predicted the unemployment rate would hold steady at 4.7%., Maki said Treasuries could be vulnerable to sell-off if the data surprises, to the upside., If either payroll growth is much stronger than expected or the, unemployment rate falls a tenth of a percent, I would expect bonds prices, The federal funds rate currently sits at 4.75%, and the FOMC next meets on, Wednesday. After a widely anticipated hike to 5% next week, Maki expects, two more rate increases in *2006-, bringing fed funds to 5.5%., The new-issue market was relatively uneventful yesterday, with only a, handful of deals of a moderate size., In the largest deal of the session, the Texas State University System, Board of Regents competitively sold $140 million of system revenue bonds, at a true interest cost of 4.6992%. First Albany Capital Inc. bought the, deal and reoffered bonds to yield from 3.7% in 2008 to 4.67% in 2034., There is a par call in 2016. Bonds maturing in *2007-, 2014 through *2016-, and 2022 through 2026 were not reoffered. Portions of the deal are insured, Financial Security Assurance Inc. Standard & Poor's rates the, unenhanced bonds A-minus., Among 5% paper, bonds maturing from 2017 through 2021 had the widest, spread to Wednesday's Municipal Market Data triple-A yield scale, with, yields 17 basis points over. Bonds maturing in 2034 were tightest to the, scale, at 10 basis points over., The Texas State University System last sold debt competitively in 2003., Merrill Lynch & Co. won that $47.6 million deal with a true interest cost, of 4.3578%., The Florida Education System also tapped the competitive market, selling, $58 million of university system improvement revenue bonds. Lehman, Brothers bought the deal and reoffered bonds to yield from 4.42% in *2021-, to 4.67% in 2026. The underwriter did not reoffer bonds of 2007 to *2020-, and 2030. Financial Guaranty Insurance Co. insured the bonds, which have, underlying ratings of Aa2 from Moody's Investors Service, and AA from, Standard & Poor's and Fitch Ratings. Bonds are callable at 101 in *2015-, declining to par in 2016., On the negotiated side of the market, UBS Securities LLC priced $100, million of general obligation bonds for West Valley-Mission Community, College District in California. Bonds were priced to yield from 3.58% in, 2006 to 4.77% in *2030-, and are callable at par in 2016. Bonds maturing in, 2006 and 2007 were not reoffered. FSA insured the debt, which carries, underlying ratings of Aa2 from Moody's and AA from Standard & Poor's.
Published in Bond Buyer (2006)
Get additional information online
E-Article
8
by Matthew HansonIssuers sold $28.9 billion of municipal debt through 964 deals last month, about 14.6% less than August *2005-, according to data released yesterday by Thomson Financial., This was the second consecutive month that market volume declined year-over-year, and muni sales now trail last year by 15.4%., A decrease in refundings has been the story all year, and August was no different, as state and local governments refunded only $6.5 billion of their debt -- 30.3% less than the same month last year., But while new-money issuance is up this year through the end of August, borrowers put 5.4% less new-money debt in the market last month than they did during the same period of last year. New-money bonds account for the lion's share of market volume, adding up to about $18.9 billion in August., This decline could be a product of following in the shadow of 2005 -- a blockbuster year when interest rates remained at historic lows. This time last year, market volume was 11.1% higher than it was in August 2004., It also could be a signal that counties, cities, and school boards are spending more time and attention on their operating budgets than capital improvements, said John Payne, managing director in charge of traditional municipal finance in Robert W. Baird & Co.'s Columbus office., It's getting tougher every year to make that operating budget work out with all the increases in health care costs and pension costs and such, Payne said., Issuance by state agencies, municipalities, local authorities, and colleges and universities were all down last month from August *2005-, Thomson data showed., Refundings might rebound during the next few months, analysts said, despite the fact that they've been consistently lower this year when compared to 2005., We had stayed at relatively low interest rate levels for quite some time, so many of the refundings that could be done had already been done, said Chris Mier, managing director at Loop Capital Markets LLC. Mier said that as interest rates increased at the end of last year and the beginning of this year, it became less cost-effective to refund bonds., But now interest rates are dropping, and 10-year Treasuries are down 50 basis points from earlier this summer., We're at a point where bonds that could not be refunded in June can now be refunded, Mier said., Other analysts agreed, predicting that September and October should mark a strengthening of refunding volume., During August, six of the 10 sectors of municipal bonds tracked by Thomson recorded decreases from the same month last year., Transportation bonds posted the largest decline, dropping 60% to $2.6 billion total par this August from $6.5 billion in 2005. But three of the five largest issues last August were transportation-related, comprising $3.7 billion., Debt sales for environmental facilities were down to just $137 million last month, a 91.1% decrease from last year. But this is a lumpy sector, which produces one-off deals on an infrequent basis, said Matt Fabian, senior analyst at Municipal Market Advisors., Development-related sales decreased by nearly two-thirds, while education bonds -- by far the largest sector at $9.2 billion total par -- remained level with last year., Public facilities issuance was the highlight of last month, totaling $942.6 million, and financing for the Mets' new stadium in Queens totaled $547.4 million. New York City also accounted for the second-largest deal with its $850 million sale of general obligation bonds on Aug. 11., Electric power also saw an 81% jump to $1.2 billion -- a sign that development around the country has created a strong demand for infrastructure, Fabian said. Utilities issuance was up 47.4% to $2.5 billion, and Fabian added that this was likely tied to the same source of demand., August traditionally is a slow month for the municipal bond market, as many of the industry's issuers, bankers, and investors take vacation before volume picks back up in September., Fewer issuers coming to market have meant a tighter spread of credit ratings, Mier said., With some of the spreads tightening, some of the insurers are deciding that if they aren't going to find credits worthy of insuring, then they'd rather give up some of their market share, however, was on par with last years' final statistics
Published in Bond Buyer (2006)
Get additional information online
E-Article
9
by Yvette ShieldsChicago will accept proposals from firms interested in leasing the, long-term rights to operate the downtown city-owned Millennium Park Garage, and three adjacent garages owned by the Chicago Park District, officials, announced yesterday., The request for qualifications from potential bidders was formally, released on Friday with a deadline for responses of June 19. Firms are, asked to provide their financial ability to raise the concession payment, and their technical capabilities to operate the facilities., The city will select qualified firms from the list of applicants later in, the month, and then will do due diligence through August for the long-term, concession lease. Final bids will be due sometime in September, said city, finance department spokeswoman Lisa Schrader., The city has selected William Blair & Co. as the lead financial adviser on, the transaction with Samuel A. Ramirez & Co. and Siebert Brandford Shank &, Co. serving as co-financial advisers. Mayer, Brown, Rowe & Maw LLP, Pugh, Jones, Johnson & Quandt, Charity & Associates PC, and Sanchez Daniels &, Hoffman are its legal advisers., The city retains the right not to proceed with a deal if the bids fall, short of an undisclosed threshold., The RFQ process mirrors the one undertaken by the city two years ago with, its groundbreaking privatization of the Chicago Skyway toll road. The, 99-year lease with a foreign consortium resulted in a $1.83 billion, infusion of cash into city coffers that helped garner a round of credit, upgrades and sparked the interest of other issuers across the country in, such deals., The city owns the garage below the new Millennium Park, which runs, downtown between Michigan Avenue and Lake Michigan and is adjacent to, Grant Park and its three Chicago Park District-owned garages Grant Park, South, Grant Park North, and the East Monroe Street garage. The four, together represent the largest underground parking system in the nation, with 9, 000 spaces. and the lease also would represent a first of its kind, though it is expected to be far less lucrative than the Skyway deal., The garages generated revenue of $24.8 million last year, of which $7.6, million covered expenses for a net operating income of $12.2 million., Daily rates range from $11 to $22 but if privatized, they would likely, increase., This potential transaction is part of Mayor [Richard] Daley's continued, leadership in pursuing innovative financial solutions to provide the, neighborhood investments and services that improve quality of life for all, the city's chief financial officer Dana Levenson said in, statement., The announcement of the RFQ process follows Illinois Gov. Rod, Blagojevich's signature last week of legislation that allows the parking, garages, several recycling centers, and Midway Airport to retain their, exemption from property taxes in the event any are leased to private, for-profit companies. Under the new law, the majority of proceeds from any, private leases entered into by the city would go to reduce debt, neighborhood improvements, and to increase the dismal funding levels of, several of the city's pension funds. The park district has said it would, use its proceeds to defease debt and improve its neighborhood parks., Before using the proceeds of a garage privatization for anything else, city would first have to retire about $160 million of limited-tax bonds, issued in 1998 and 1999 to finance construction of the garage, ending a, political dilemma for Daley. The revenue generated by the garage has, consistently fallen short of what is needed to cover debt service., Chicago has tapped reserves in the past to compensate for the shortfall, including revenue generated from a derivatives contract that has since, been terminated. While the city can use a wide range of revenues under the, limited-tax pledge, Daley long ago pledged not to use any property tax, dollars to repay the bonds. Though parking revenues are on the rise, city tapped reserves to cover a shortage in the $5.3 million January, payment. It owes a $3.5 million payment in July and has $4.8 million, remaining in reserves., The Park District previously had debt outstanding backed by parking garage, revenues but in 2002 converted the $78 million issue from 1999 to a, general obligation pledge. The original debt financed the reconstruction, of several of the garages. The district does, however, cite parking garage, revenues as the alternative revenue stream that is used to repay the debt.
Published in Bond Buyer (2006)
Get additional information online
E-Article
10
by Matthew HansonExecutives from the PMI Group Inc., the largest equity owner of Financial Guaranty Insurance Co., said they plan to announce the opening of a new financial guarantor by the end of this week., The new company, PMI Guaranty, will aim for double-A credit ratings and will begin with a focus on wrapping mezzanine-level debt in the structured mortgage market. Once the new insurer settles in, however, it could look to grow into other sectors, including municipal bonds, management said., We'll be announcing 'open for business' hopefully in the next several days, said Bradley Shuster, president and chief executive of the PMI subsidiary, PMI Capital Corp., There are a couple -- one or two things -- left on the punch list to do, but it should be any day now. We'll be out talking about it at the national [Mortgage Bankers Association] meeting, Shuster first explained the new venture to a group of PMI investors at a conference on Oct. 6. He said PMI Guaranty, domiciled in Jersey City, N.J., would allow the parent company to enhance all layers of credit., Slides used in the presentation include a diagram of the company's planned use that sandwiches PMI Guaranty between the PMI's traditional mortgage insurance companies and FGIC, the triple-A insurer it helped take independent in 2003., PMI is the largest equity investor in FGIC, holding a 42% stake in the company it helped split off from General Electric. Fellow investors from the Blackstone Group, the Cypress Group, and CIVC Partners bought about 23%, and 7% of the equity, respectively. GE retains a small stake., PMI still names five of FGIC's 14 directors, one of which is Shuster, who now chairs the board's audit committee., Representatives from FGIC declined to comment on how they would work with PMI Guaranty or how the new company would affect their business., FGIC's growth over the last three years has propelled financial guaranty to make up about $69.5 million, or 17%, of PMI Capital Corp.'s net income in 2005. Five years earlier, the segment provided $5.2 million, or 2%, of company profits, according to Shuster's investor presentation., But this year's headline stories for financial guarantors have been tight credit spreads and aggressive pricing competition -- not the most welcoming environment for a new market entrant, ratings analysts said., With all those types of factors out there, it's just hard to imagine someone wants to be another one, making the eighth bidder instead of seven bidders on a deal, said Dick Smith, So I would say that if anybody is going to try to do this, Going after a specific corner of the market is exactly what PMI plans to do for now, said Art Slepian, vice president of financial guaranty at PMI., Typically, single-A rated ACA Financial Guaranty Corp. and double-A rated Radian Asset Assurance Inc. compete for enhancement on credits too risky for the triple-A monolines., Shuster and Slepian said they think their New Jersey license will be enough to start operating their mortgage-focused business for now, but said they will consider expanding to municipals once they have accumulated staff and experience in related sectors., Over time we'll look to grow the business and expand into other asset classes as we build the expertise to underwrite those transactions, Winston Wohr, currently a PMI vice president of financial guaranty
Published in Bond Buyer (2006)
Get additional information online
E-Article
11
by Elizabeth AlbaneseR.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. on Monday placed a, combined $755 million of their 2006 Master Settlement Agreement payments, into escrow accounts pending arbitration that will determine how well, participating states have enforced certain mandates of the agreement., Complete information about the amount of MSA revenue available this year, to the 46 states and six territories that signed the agreement in *1998-, will not be available until tomorrow. Although payments were due yesterday, for the original companies that signed the MSA - Reynolds, Lorillard, Philip Morris USA - payments by smaller manufacturers, known as subsequent, participating manufacturers or SPMs, are not due until April 19., Eleven SPMs last year withheld a portion of their 2005 MSA payments or, placed money into escrow accounts. The companies claimed that their, participation in the MSA caused them to lose market share in 2003 - and, some companies also withheld MSA payments based on market share they claim, they lost in 2004., A clause in the MSA allows participating companies that have lost market, share to those that did not sign the agreement - known as, non-participating manufacturers, or NPMs - to reduce their payments by, three times the amount of market share lost if market share loss is, greater than 2%., Market share loss in 2003 for tobacco's Big Three was 6.2%. On March 28, the Boston-based Brattle Group, which served as mediators for the, companies and the states and territories that signed the agreement, ruled, that the MSA was a determining factor in market share loss by the, companies. As such, the companies could reduce their payments by a total, of 18.6%. Had all three companies opted to withhold that amount or place, it in escrow, the predicted MSA payment of about $6.5 billion would have, been reduced by $1.2 billion., Analysts predicted that such a reduction of revenue to states expecting, those payments would have spurred several tobacco bond issuers to dip into, reserves in order to meet debt service obligations this year. Among the, issuers analysts predicted might have difficulty meeting interest and, principal payments should the entire NPM adjustment have been taken were, Rhode Island's Tobacco Settlement Financing Corp., the California County, Tobacco Securitization Agency for its issue on behalf of the Sonoma County, Securitization Corp., and the Puerto Rico Children's Trust Fund., However, on March 31, Philip Morris, by far the largest participant in the, agreement because of its significant market share, announced that the, company had made a full $3.4 billion MSA payment., At the time, the National Association of Attorneys General, which oversees, all MSA issues, commended the company for its full payment, which accounts, for about 50% of all annual MSA revenues. The NAAG did not have any, comment yesterday regarding the NPM adjustments taken by Reynolds and, Lorillard., Although Reynolds made its full $2.016 billion payment, the company placed, $647 million of that amount into a dispute account. Lorillard also made, its full $666 million payment, but placed $108 million into a dispute, account., David Howard, a spokesman for Reynolds, said that the company made a, $1.369 billion MSA payment on March 31, but opted to wait until the, deadline to determine whether it would take its NPM adjustment or pay the, entire 2006 payment., Sources close to Lorillard said that company also made its payment of $558, million on March 31 but waited until yesterday to announce its decision to, take the NPM adjustment., Under the terms of the MSA, participating tobacco companies will pay the, states and territories a total of $246 million over a period of no fewer, than 25 years., The payments are meant to compensate states for the cost of caring for, indigent sick smokers. The companies must make those payments as a, condition of selling tobacco products in the U.S., The settlement precludes further action by any participating state for, such monies in the future., To reduce the possibility that NPMs could lower their prices significantly, and take market share away from those companies whose price structures, included the burden of MSA payments, model, Those statutes require companies that did not sign the MSA to make, payments into escrow funds that would be tapped if those companies are, ever sued for the cost of caring for sick smokers. However, unlike the MSA, payments, NPM escrow payments are not tax-deductible., Many NPMs have sued or are in the process of suing various attorneys, general, maintaining that they should not be forced to make payments into, a lawsuit account because they have never been sued., One of the terms of the MSA requires states and territories to ensure, of the model statutes. Attorneys general for a, number of states have sued NPMs to force escrow payments., The issue of diligent enforcement will determine whether the disputed, payments will be returned to tobacco companies or distributed to states., According to Section XI.c. of the MSA, the Brattle Group's March 28, shall be submitted to binding arbitration before a panel of, three neutral arbitrators, each of whom shall be a former Article III, federal judge. Each of the two sides to the dispute shall select one, arbitrator. The two arbitrators so selected shall select the third, arbitrator. The arbitration shall be governed by the United States Federal, Howard said that Reynolds expects the arbitration to be handled as, outlined in the agreement, rather than being determined in venues in all, participating states and territories., He said that while the company is actively pursuing its NPM adjustment for, *2003-, the company has not determined whether Reynolds would seek an NPM, adjustment for *2004-, during which time the company's market share loss, also exceeded 2%., I can't, speculate as to what the company might do, but the MSA certainly allows us, Analysts say that unless there is a surprise regarding the SPM payment on, Wednesday - for instance, if those companies opt to withhold or dispute, payments for multiple years - all tobacco bond issuers should be able to, meet their debt service obligations this year., All told, unless we have any surprises on the SPM front, we're looking at, said Dick Larkin, a municipal, All the issuers will be able to make, their interest and principal payments without going into reserves. Some of, them will be able to just by the skin or their teeth - my research tells, me that Rhode Island will have just about $200, 000 to use for turbo bonds, He said that if all of the SPMs, however, decide to take NPM adjustments, for multiple years, the adjusted payments could reduce MSA payments by, about $1 billion, which could throw cold water on tobacco bonds., Despite the added pressures caused by the adjusted payments, tobacco bonds, continue to fare well in the market., Tobacco bond prices were down the first two weeks of April - since this, whole thing started - but not more than the market as a whole, said Ron, Fielding, a senior vice president with OppenheimerFunds Inc. Fielding, oversees the firm's municipal bond fund group, was an early investor in, tobacco bonds., With the payments that have been made, however, the only difference that, we'll see is that perhaps fewer turbo bonds will be paid, those are trading at a premium thanks to the flat yield curve, so that's, not a bad thing. Mathematically speaking
Published in Bond Buyer (2006)
Get additional information online
E-Article
12
by Bill CurranAlthough bid-wanted activity appeared to taper off yesterday, the municipal market continued to weaken as a sell-off in Treasuries ahead of a meeting next week of the Federal Open Market Committee pushed government bond yields to multi-year highs., Traders said tax-exempt yields increased by three to four basis points as prices fell., I can't even say that it's raining bonds, that there are bid-wanteds everywhere. It's more that people aren't doing anything today. There aren't as many bonds out for the bid, with the Treasury softness, A trader in Los Angeles said the market was trudging through some illiquidity due to a lack of buy-and-hold investors., A lot of firms are full to capacity, and that is hurting our activity. People can't shovel out their old stuff fast enough to take in new stuff, Although the flow of bid-lists into the market slowed yesterday to a more manageable pace, Employers Reinsurance Corp. reportedly put out for the bid a list of about $350 million of bonds, its fourth list of about that size since June 13. ERC is selling a total $7.5 billion of high-grade municipal bonds, according to market sources. Selling by arbitrage accounts was muted yesterday after several days of heavy liquidation., Dealers, however, were not able to enjoy a day's reprieve from red ink because Treasuries slid lower, dragging municipals along. With fairly robust weekly jobs data helping to spook a jittery market, the yield on the two-year note increased three basis points to 5.24%, its highest level since December 2000. The 10-year Treasury note yield increased five basis points to 5.21%, its highest level since May 2002., The Labor Department reported this morning that first-time applications for state unemployment benefits rose 11, 000 to 308, 000 in the week ended June 17, slightly lower than the 310, 000 level predicted by IFR Markets. The four-week moving average - typically viewed as a better gauge of unemployment - was 311, a decrease of 5, 000 from the previous week's revised average of 316, 250., The claims numbers have come back down and again are pointing to a solid payrolls number, said Ethan Harris, More broadly, Harris attributed the recent losses in Treasuries to a growing recognition of the inflationary pressure in the economy and the monetary tightening the FOMC will use to fight it., I think there's a gradual realization in the Treasury market [of] the longer-term inflation risks in the U.S., Harris expects the FOMC to increase the federal funds rate to 5.25% from its current 5% when it meets Wednesday and Thursday. He forecast a year-end funds rate of 5.75%., I don't think you're going to get any hint of a pause out of this meeting from the Fed, which could hurt the economy's prospects for growth., In other economic data yesterday, the Chicago Fed national activity index for May was negative 0.16, down from a downwardly revised positive 0.26 reading in April. The three-month moving average remained positive at 0.16 in May, And the composite index of leading economic indicators was down 0.6% in May, according to the Conference Board., In the new issue market, Loop Capital priced the $245 million of Michigan trunk-line fund bonds to yield from 3.83% in 2008 to 4.52% in 2021. Reflecting the weakness in the secondary, Loop increased most yields by one to three basis points at repricing. Financial Guaranty Insurance Co. insured the bonds, with have underlying ratings of Aa3 from Moody's Investors Service, AA from Standard & Poor's, and AA-minus from Fitch Ratings. Bonds are callable at par in 2016., 4.66% in 2031 and 4.69% in 2036. A $10 million refunding series was priced to yield from 3.75% in 2008 to 4% in 2012. Bonds are callable in 2016 at par. Ambac Assurance Corp. guaranteed the bonds, which have underlying ratings of A2 from Moody's and A from Fitch.
Published in Bond Buyer (2006)
Get additional information online
E-Article
13
by Elizabeth AlbaneseThe mayors of Dallas and Fort Worth, as well as executives from American, Airlines and Southwest Airlines, yesterday signed an agreement that would, lift restrictions imposed by the Wright Amendment by 2014 and could include, the issuance of up to $200 million of airport revenue bonds to refurbish, aging Dallas Love Field., The agreement is dependent on approval from Congress. The parties, involved in the discussions said they would seek sponsors in coming days, new legislation carrying out the directives of the proposal., In addition, the points of the deal are expected to be included in a, contract between the cities and the airlines. The Wright Amendment is, considered by many bondholders for Dallas-Fort Worth International Airport, important protection for the facility's approximately $4 billion of, outstanding revenue bonds because it limits competition at Love Field., According to DFW Airport executive director Jeff Fegan, the agreement, will eliminate a great uncertainty that has plagued our airport over the, adjust our business plans as well as, Under the agreement, non-stop flights from Love Field to destinations, throughout the 50 United States and the District of Columbia will be, allowed, in eight years, but carriers operating from Love Field will be able to, to all U.S. destinations., Currently, airlines may sell tickets from Love Field only to points, within Texas, Louisiana, Arkansas, Oklahoma, New Mexico, Alabama, Mississippi, Kansas, and Missouri. Passengers traveling to destinations, outside those states must buy separate tickets for the additional legs of, their flights., The agreement also prohibits any direct or connecting international, travel from Love Field and reduces the number of gates at the facility to, from 32. Southwest Airlines would keep 16 of those gates, while American, Airlines and Continental Airlines would receive two gates each. The leases, signed by the airlines would include provisions requiring them to share, gate, space with any other airline that would wish to fly from the airport., The deal also includes provisions to finance improvements at Love Field, including modernization of the shabby main terminal and demolishing the old, Legend Airlines terminal to free up space., The improvements are expected to cost up to $200 million, which would be, financed by bonds backed by landing fees and other airport revenues., Debt service obligations are expected to increase landing fees at Love, Field., After missing their original deadline on Wednesday to put such an, agreement together, Dallas Mayor Laura Miller, Fort Worth Mayor Mike, Moncrief, and airline officials worked until about 2 a.m. Thursday, hammering, out an agreement that would be palatable to all parties., The agreement, however, would only go into effect if approved by the U.S., Congress. Several bills are being promoted by various lawmakers to either, repeal the 1979 amendment or to enforce it., The 1979 Wright Amendment and subsequent federal legislation prohibit, direct flights from Love Field to all but a handful of states. The measures, were implemented at the request of federal, state, and local officials --, well as officials from the then-recently opened Dallas-Fort Worth, International Airport -- to protect the operations at the new facility, which, was operating in what was then considered a remote location between the two, cities., Also supporting the amendment were bondholders who wanted to protect, their investment at DFW Airport and Southwest Airlines officials, lobbied, for the measure., When DFW opened in *1974-, Southwest Airlines was able to avoid moving its, operations to the new facility because it was an intrastate carrier and not, subject to the dictates of the Federal Aviation Administration. As such, airline was allowed to remain at Love Field, which had been -- under, federal, law -- scheduled for closure., The sands shifted in *1978-, however, when Southwest Airlines officials, wanted to fly from Dallas to New Orleans. Since federal law at the time, required all interstate carriers to operate from DFW Airport, lobbyists for, Southwest, as well as Southwest executives including Herb Kelleher, worked, hard to get the Wright Amendment approved so that the airline would not, have, to move its operations to the larger airport, which also carried higher, landing fees and lease costs., At a press conference Thursday at the Grand Hyatt Hotel at DFW Airport, All sides, all parties have been, compelled to make sacrifices [in the negotiations process]. The only, Also included in the agreement is a ban on passenger service from, regional airports within 80 miles of Love Field -- such as Alliance Airport, in north Fort Worth, currently a cargo facility, or Fort Worth's Meacham, Airport -- for eight years., If after 2014 passenger service was added to other airports and Southwest, Airlines opted to fly from those locations, the airline would be required, give up some gate space at Love Field., In addition, if Congress does not approve the local agreement, Southwest, Airlines would voluntarily give up eight gates at Love Field.
Published in Bond Buyer (2006)
Get additional information online
E-Article
14
by Elizabeth AlbaneseTexas lawmakers scrambled late Friday to close the books on a number of, issues in the special session that ends tomorrow, with the House approving, the second component of a school finance plan touted by Gov. Rick Perry, and the Senate working toward approval of $3.7 billion of tuition revenue, bonds to finance projects for state colleges and universities., The House late Thursday reached a consensus on the tuition revenue bond, issue, which provides funding for a number of projects at public colleges, universities across the state., HB 153 was originally filed during the 2005 legislative session, failed to make it to the floor of either house for a vote. The measure, approved unanimously by the House, provides facilities funding to nearly, every college, university, and university system in the state., We have developed a criteria for ranking the projects in the most, said Susan Brown, assistance commissioner to the, We look at the projects from a, number of different viewpoints, including enrollment, graduation rates, research money, whether the facility was part of the school's master plan, Because a number of schools are providing additional funding from other, sources, the actual amount of the projects included in HB 153 is about $4.5, billion, Brown said., but not provided, funding for it. Sources at the capitol said it was likely that lawmakers, would wait until the 2007 regular legislative session to identify revenues, for debt service., The state has always committed [to pay TRBs], and I think we'll do, said Rep. Geanie Morrison, R-Victoria, author of HB 153., Unlike the state's triple-A rated Permanent University Fund debt issued, the University of Texas System and the Texas A&M System, TRBs are, largely, backed by state appropriations., Meanwhile, the tax bill approved in Congress last week and sent to, President Bush includes language that would codify the ability of the Texas, PUF to back bonds., Philip Aldridge, the associate vice chancellor for finance at the UT, System, said that the measure clarifies the Internal Revenue System's, current, exemption of the PUF from arbitrage rules., In *1984-, the IRS exempted the PUF from the arbitrage rules, recognizing, that the PUF had not been created for any type of arbitrage purposes, Similar language had been inserted into a Republican-authored tax-cut, bill sent to then-President Clinton in *1999-, but he carried through on a, threat to veto the measure, killing with it the PUF clarification., Currently, 20% of the PUF's worth can be used to back bonds, according to, IRS rules. According to a spokesman in the office of U.S. Rep. Kevin Brady, R-the Woodlands, the IRS ruling trumps a provision in the Texas, Constitution, that would allow up to 30% of the fund's corpus to back bonds., Texas lawmakers are in special session ostensibly to hammer out new, revenue streams to finance public education, but expected approval of, Perry's, proposed school finance plan led the governor to expand the call of the, session. In addition to the tuition bonds, lawmakers are looking at, measures, that would prohibit demonstrations at the site of funerals or memorial, services for members of the military killed in the line of duty., The state is under order by the Texas Supreme Court to reduce its, reliance on local property taxes to fund public education. According to the, November opinion released by the high court, local property tax rates have, reached the maximum allowed by law, and without significant state aid, have, to set their own tax rates -- a violation, the state constitution., The Legislature has until June 1 to correct the problem or face a halt of, all state money to public schools. Currently, state aid accounts for about, of all revenues spent by public schools, with the bulk of state monies, slated, for property-poor school districts., Already waiting for Perry's signature is a plan to exchange a current, loophole-riddled 4.5% franchise tax with a 1% gross-receipts tax that would, be paid by most businesses in the state. Both houses of the legislature, approved a 1% gross-receipts tax to replace the state's outmoded and, loophole-riddled 4.5% business franchise tax within the first two weeks of, the session. That measure is on Perry's desk, awaiting his signature., The House also handily approved early in the session proposals to reduce, local property tax rates and increase the state's cigarette tax by $1 per, pack., The Senate, however, opted to approve those measures with a number of, changes, and sent them back to the House for a second round of votes., Late Friday, House members voted 136 to 8 to the Committee Substitute for, House Bill 1, which cuts local property taxes by one-third over the next, years and taps $3.8 billion of surplus funds to provide teacher pay, increases, and curriculum enhancements., Over the weekend, House members were expected to tackle discussions of, the Committee Substitute for House Bill 5, which would increase cigarette, taxes by 75 cents per pack in January and an additional 25 cents in, September, 2007.
Published in Bond Buyer (2006)
Get additional information online
E-Article
15
by Michael Scarchilli and Matthew PosnerThe municipal market was unchanged yesterday, as anticipated inflation data matched expectations., However, there still seems to be some interest in bonds. There are some bidders, which is an improvement in this situation from the last week. As far as the data goes, it's funny how we used to really focus and hang on the economic announcements and act accordingly. Now, we don't bother, we just wait to see what the Treasury market does in the wake of the economic data and take our cue from that. Instead of acting, The Treasury market was quiet yesterday. The yield on the benchmark 10-year Treasury note, which opened at 4.77%, was quoted near the end of the session at 4.76%. The yield on the two-year note finished at 4.85%, after opening at 4.84%., Trades reported by the Municipal Securities Rulemaking Board yesterday, however, showed some losses. A dealer sold to a customer Wisconsin Housing and Economic Development Authority 5.197s of 2009 at 5.32%, one basis point higher than where they traded yesterday. A dealer sold to a customer insured New York City Industrial Development Agency 5s of 2046 at 4.48%, up two basis points from where they traded Monday. A dealer sold to a customer Port Authority of New York and New Jersey 5s of 2018 at 4.05%, even with where they were sold yesterday., In economic data released yesterday, the consumer price index dropped by 0.5% in September, compared to the 0.2% gain that was expected by economists surveyed by IFR Markets. In August, overall CPI was reported as a 0.2% gain., The core CPI figure, which excludes volatile energy and food prices, made a 0.2% gain, matching the expectation of economists polled by IFR Markets. The increase is in line with the gains reported in the last three months., In other economic news, new home starts rose in September to 1.772 million units, above the 1.640 million units expected by economists polled by IFR Markets. This is the first gain for this figure in the last three months. August's number was revised to 1.674 million., New building permits, on the other hand, dropped to 1.619 million in September, lower than the 1.708 million expected by economists polled by IFR Markets and also lower than last month's report's revised figure of 1.727 million., In the primary market yesterday, Merrill Lynch & Co. priced $800 million of tax and revenue anticipation notes for Puerto Rico. No further information on the Trans, which mature in *2007-, was available by press time., The Port Authority of New York and New Jersey competitively sold $300 million of consolidated revenue bonds to Merrill Lynch, with a true interest cost of 4.64%. The bonds mature serially from 2026 through 2032 and term bonds mature in 2035. Bonds maturing in *2026-, while Standard & Poor's and Fitch Ratings assign their AA-minus rating to the debt., 2039 and 2044. Yields range from 3.50% with a 4% coupon in 2007 to 4.46% with a 4.45% coupon in 2026. The bonds are callable at par in 2016. The debt, which is backed by payments to the bond trustee from the university, is rated Aa1 by Moody's and AA-plus by Standard & Poor's., The New Jersey Environmental Infrastructure Trust competitively sold $143 million of environmental infrastructure bonds to Citigroup Global Markets Inc., with a true interest cost of 4.20%. The bonds mature from 2008 through *2026-, Seattle competitively sold $121 million of drainage and wastewater revenue and refunding bonds to Goldman, Sachs & Co., with a TIC of 4.42%. The bonds mature from 2007 through 2026 and have term bonds maturing in *2029-, 2032 and 2037. Bonds maturing from 2007 through *2009-, which are uninsured. The underlying credit is rated Aa2 by Moody's, and AA by Standard & Poor's., Also, South Carolina competitively sold $58 million of general obligation bonds to Citigroup, with a net interest cost of 4.17%. The bonds mature from 2007 through *2026-, with yields ranging from 3.55% with a 5.25% coupon in 2009 to 4.03% with a 5% coupon in 2021. Bonds maturing in *2007-, *2008-, *2012-, and from 2022 through 2026 were not formally re-offered. The bonds are callable at par in *2016-, and are rated Aaa by Moody's, AA-plus by Standard & Poor's, and AAA by Fitch., South Carolina also competitively sold a $32.8 million component, to Morgan Keegan & Co., with a TIC of 4.21%. Yields range from 3.72% with a 5% coupon in 2014 to 4.36% with a 4.25% coupon in 2026. Bonds maturing from 2007 through *2013-
Published in Bond Buyer (2006)
Get additional information online
E-Article
16
by Christine AlbanoMunicipal bond mutual funds siphoned the most value out of the market by extending their durations for select income opportunities, new coupon structures, and enhanced credit quality as yields fell across the board during the third quarter., Jeff Kozemchak, a senior vice president and portfolio manager at Federated Investors in Pittsburgh, The institutional shares of the short-term fund ranked fifth, as they posted a total return of 1.66% for the quarter and 3% over the trailing 12 months. The income component of the share class' total return totaled 3.31% over the 12-month period, according to the Denver-based Lipper., The F-class shares of the limited-term fund ranked seventh in the category with a total return of 1.64% for the quarter. Over the trailing 12-months, the share class had a total return of 2.76% as its income totaled 3.08%., comparison, the short-term peer-group total return averaged 1.24% for the quarter. Over the past 12 months, the category total return has averaged 2.83% as its income has totaled 2.85%., We lengthened significantly and continued to buy when short-term municipal rates peaked in the first week of July, acting on expectations that the end of the Federal Reserve's interest-rate tightening was nearing its end, Kozemchak said., On the short-term fund, for instance, he lengthened its duration to between 2.4 and 2.5 years, and by doing so, I think the duration call we made in the second quarter really helped us in the third, Kozemchak said. Approaching the second quarter, the fund's duration was 1.6 years., As insurance against rising yields, Kozemchak focused on buying high-grade and insured paper in the two- to five-year portion of the curve, which offers better price performance in such environments compared to lower-quality bonds, In any given small period, like a quarter, price move is the driver of total return -- not income, The average credit quality of Kozemchak's short-term fund is AA-minus, while his limited-term fund carries an average credit quality of A-plus and holds only investment-grade paper., Goldman Sachs Asset Management, meanwhile, the share class has had a total return of 3.13%, as its income has totaled 3.44%., Extending duration also proved to be the right strategy for other fund managers with high-grade funds as well as those with high-yield funds., When Matt Kiselak, a senior portfolio manager at Evergreen Investments in Charlotte, N.C., sold defensively structured bonds in his $100 million high-grade municipal bond fund and extended its duration, the fund's I shares reaped the reward as it earned the sixth spot in the Lipper's insured municipal fund category., The share class posted a total return of 3.63% for the quarter, versus the peer group's 3.22% average three-month cumulative total return. Over the past 12 months, the share class earned a whopping 4.55% total return and 4.17%, compared to the peer group's average 3.66% total return and 3.72% income., The first spot in the insured category was held by the administrative shares of the Vanguard Group's Vanguard Insured Long-Term Tax-Free Fund, which posted a total return of 3.72% for the quarter., Kiselak sold bonds with short calls and high coupons -- some as high as 51, 2 -- and replaced them with longer-dated bonds from new issues with 5% coupons, current call dates, and a little incremental yield., We expected rates to fall, and because of that, defensive bonds don't perform well, he explained., Kiselak employed this strategy in the beginning of August during the summer doldrums when the market was still rallying and there was not a lot of supply around. By doing so, adding duration and incremental yield that led to the success of his fund, which holds 65% in insured debt and has an average credit quality of triple-A., Yield players, meanwhile, said they were extremely cautious when considering speculative bonds in the backdrop of historically tight credit spreads, which is creating significantly more risk in the high-yield market now than in previous years., Still, careful credit selection, as well as lengthening duration, led to high performance and top rankings for several high-yield funds, including the Eaton Vance High-Yield Municipal Fund, whose class-A shares scored the first spot for the quarter with a 4.09% total return, and the A-class shares of the Oppenheimer Rochester National Fund, which ranked fourth in the category with a total return of 4%. The average total return for the peer group during the quarter was 3.26%., Tom Metzold, a senior vice president at Boston-based Eaton Vance Management, said he managed to eek out relative value for the high-yield fund he manages by maintaining modest volatility, upgrading credit quality, and making changes to duration when necessary., We have chosen to take the route of upgrading the credit quality of the portfolio as we wait for other opportunities in the credit cycle, Metzold said., The fund has had exposure to lower investment grade paper over the years, but has less now because, given how narrow credit spreads are, we have chosen to not participate as significantly, While upgrading credit quality can present short-term consequences, such as sacrificing lower dividends, Metzold said his decision was dictated by the extremely tight credit-spread environment. The fund's average credit quality is A-plus., If interest rates continue to fall as they did in the third quarter, than when the fund was heavily weighted in triple-B, lower investment-grade paper, Metzold said., To achieve high performance in the third quarter, He also limited his exposure to tobacco and airline bonds, which have minimal upside potential in the current credit cycle, We didn't think it made sense to chase a lot of that for only a few basis points, As the months wore on, we did use some hedges to try and reign in the duration so it didn't get too long beyond peer group, Metzold said, noting that he generally keeps the fund's duration to between seven and eight years., Ron Fielding, senior vice president and chief investment strategist at OppenheimerFunds in Rochester, N.Y., said his $5.75 billion Oppenheimer Rochester National Fund achieved its performance by maintaining a duration of eight years, an average credit quality of BB-plus, and wide diversity among the 900 different bonds it holds., The fund gained a significant amount of its income from having overweight positions in tobacco and airline bonds, the latter of which outperformed in the third quarter., Besides its above-average total return for the quarter, the fund's class-A shares delivered a 9.61% total return over the past 12 months, with an income of 5.47%., Tightening spreads help total return, but makes it harder to find value now, It's getting much more difficult to get properly paid to take credit risk, We are being more cautious than in years past, Second place in the high-yield category was held by the class-A shares of the John Hancock High-Yield Municipal Fund, managed by John Hancock Advisors Inc., which posted a total return of 4.06% for the quarter. Over the past 12 months, the share class has had a total return of 7.08% and its income has totaled 4.87%., Oppenheimer also scored high rankings with its $1.9 billion Oppenheimer Limited Municipal Fund, whose Class A, and B shares ranked first, third, and fourth, respectively, in Lipper's short-intermediate category, by focusing on the high-grade segment of the market., That fund is made up of 95% investment grade paper and has a duration of 4.8 years. At the same time, however, the fund owns more triple-B paper than its peers, as 24% of its assets are stashed in tobacco settlement revenue-backed bonds and 7% are in airline paper, which added to its success, Fielding said., Since tobacco bonds are investment-grade, the fund is able to own a heavy concentration of the credit and benefit from the higher yields they offer, Fielding said., The A-shares of the fund posted a total return of 2.56% for the quarter, compared to a peer-group average of 1.95%. Over the past 12 months, the share class has produced a total return of 4.71%, versus a 2.65% peer-group average. The share class' 4.32% income over the past 12 months compares to a 2.91% peer group average., as well as eighth and ninth., Funds with shorter durations in the category struggled versus their peers., Mike Brilley, president and chief fixed-income officer at SIT Investments in Minneapolis, said the market rally during the second quarter hurt the performance of the $355.1 million SIT Tax-Free Income Fund relative to its competitors., This fund has higher income return than most funds, but the duration is shorter than most other intermediate funds, which is why it lagged in the third quarter, but also why it outperformed earlier in the year when interest rates were going in the other direction, Brilley said., The fund ranked 262nd out of 264 fund shares listed in the general municipal category, with a 2.25% total return for the quarter. That compared to a 3.27% category average., The SIT fund also posted a 3.40% total return over the past 12 months, compared to a category-average of 4.16%. However
Published in Bond Buyer (2006)
Get additional information online
E-Article
17
by Michael Scarchilli and Matthew PosnerThe municipal market was slightly firmer yesterday, as economic data came in mostly lower than expected. Traders said tax-exempts were firmer by about one basis point., The market is pricing a lot of deals today, and we are seeing things coming out a bit firmer than the day before, You can, however, get some bonds at a discount in the 2015 range. It is definitely firmer, but market participation just isn't where it should be at this time of year, The Treasury market experienced early gains, but ended the day largely flat. The yield on the benchmark 10-year Treasury note, which opened at 4.78%, finished at 4.77%. The yield on the two-year note was quoted near the end of the session at 4.84%, after opening at 4.85%., The overall producer price index plunged 1.3% in September, its first drop in seven months. The decrease came as energy prices sank by 8.4%, the largest drop since July *1986-, when the sector fell 14%. The overall decline was larger than the 0.7% drop predicted by economists polled by IFR Markets, and followed August's 0.1% rise., Meanwhile, the September core PPI, which excludes food and energy prices, rose 0.6%, much higher than the 0.2% rise predicted by IFR Markets, and followed a revised 0.4% drop in August., Industrial production declined 0.6% in September, primarily due to a 4.4% drop in utilities production and a 0.3% decline in manufacturing. The September decline was the first since January, and followed an unchanged figure in August. Economists polled by IFR Markets predicted a 0.2% decrease., The capacity utilization rate fell 0.6 percentage points to 81.9% in September, down from an upwardly revised level of 82.5% in August. Economists polled by IFR Markets predicted an 82.3% level., In the primary market, a $1.2 billion Louisiana offering led the way, with term bonds in *2031-, *2036-, *2039-, and 2041. Yields range from 4.00% at par in 2016 to 4.79% with a 4.5% coupon in 2041. The bonds are callable at par in 2016., Financial Security Assurance Inc. provides insurance on bonds maturing in *2031-, *2036-, and *2039-, Financial Guaranty Insurance Co. insures the 2041 term maturity, and XL Capital Assurance Inc. backs the serial debt, maturing from 2016 through 2028. The underlying credit is rated Aa3 by Moody's Investors Service, AA-minus by Standard & Poor's, and A-plus by Fitch Ratings., Among 5% coupon paper, bonds maturing in 2031 and 2036 were tightest to Monday's Municipal Market Data triple-A yield curve, with yields 14 basis points over. Bonds maturing between 2023 through 2025 were widest to the scale, with yields 21 basis points over., Bonds maturing from 2016 through *2028-, and in 2036 were priced for retail investors Monday, with yields ranging from 4.01% with a 4% coupon in 2016 to 4.68% with a 4.625% coupon in 2036. About $20 million of the deal was sold to retail customers., The Virginia Housing Development Authority competitively sold $180 million of commonwealth mortgage bonds to Merrill Lynch & Co., with a true interest cost of 4.67%. The bonds mature serially from 2007 through *2017-, Wisconsin competitively sold $100 million of clean water revenue bonds to Banc of America Securities LLC, with a true interest cost of 4.36%. The bonds mature from 2008 through *2027-, Also, the Washington Suburban Sanitary District, competitively sold $83 million of refunding bonds to JPMorgan in three series, 2012 through *2016-, and in 2020 were not re-offered. The second series of $10 million of sewage disposal refunding bonds matures from 2007 through 2020., Yield ranges are identical to the first series of the sale, 2012 through *2016-
Published in Bond Buyer (2006)
Get additional information online
E-Article
18
by Alison L. McConnellPendleton County, Ky.'s second round with the Internal Revenue Service isn't going as well as its first., Pendleton County's bonds were sold in 1993 to raise public property-financing funds for the Kentucky Association of Counties Leasing Trust, a pool of municipal issuers in the Bluegrass State. The deal consisted of $90 million of Series A and $10 million of Series B bonds. The Series A bonds were redeemed last year., Kutak Rock LLP was bond counsel and Rauscher Pierce Refsnes Inc., now part of RBC Capital Markets Inc., was underwriter. Fulbright & Jaworski LLP was underwriter's counsel., In a material event notice filed with the nationally recognized municipal securities information repositories, the county said the IRS initially audited the bonds in *1998-, closing the exam on Jan. 27, *2000-, with a letter informing it that there had been no change to the bonds' status., Then, on Sept. 16, *2004-, the agency opened a second audit of the Series 1993 bonds. It sent Pendleton a preliminary adverse determination of taxability on Feb. 8 of this year., TEB issued a proposed adverse determination, consisting of a transmittal letter and an explanation, with respect to the bonds, tax-exempt., The letter states further that the county may appeal the proposed determination to the IRS Office of Appeals., the county said., Pendleton did just that, filing a protest and a request for a review from Appeals on June 9. Bradley S. Waterman, the Washington-based tax controversy attorney representing the county before the IRS, said yesterday that he could not discuss the case., While the county's disclosure of that determination - and its announcement of the proposed letter this week - did not identify the issues in the audit, sources familiar with the case said both exams dealt with the same set of questions about the bonds' initial qualification as tax-exempt debt. In the past 10 years, the IRS has investigated several Kentucky blind pool deals for arbitrage violations and other issues, in which it was sometimes unclear at the time of issuance who would borrow the funds., In tax-exempt bonding in general, bondholders are removed from the issuance process and the IRS treats municipal issuers as taxpayers for most administrative and examination purposes. An exception to that treatment, however, appears to be its application of the protections afforded by Section 7605 of the tax code., shall be subjected to unnecessary examination or investigations, That section, according to the IRS, is not applicable to issuers because the audit is technically of bondholders, conclusion for a particular tax year of the bonds' life, it is not precluded from examining subsequent tax years for the same issues, officials say., The issue of double jeopardy has been addressed by the agency in the past, The idea of being subjected to a second audit with respect to the same transaction appears to be unfair and contrary to the notion that the issuer be afforded the protections of a taxpayer, Having said that, the IRS has been generally reticent to open a second examination where they closed out the first one and there is no additional information, or where the issue in question in the second audit would be the same as that of the first, Caprera said., Charles Anderson, field manager of the IRS' tax-exempt bond office, In some cases, Anderson said in March
Published in Bond Buyer (2006)
Get additional information online
E-Article
19
by Alison L. McConnellA Minnesota district court has been asked to order U.S. Bank to release $2 million of bond proceeds from a 2002 Manitowoc, Wis., Community Development Authority deal to settle one of the most abusive arbitrage schemes unearthed by the Internal Revenue Service in recent years, according to documents filed in the case., The $150 million multifamily housing bond transaction, which is nearly identical to contemporaneous deals done in Missouri and Oklahoma, has been declared taxable because part of the issue carried a 30% interest rate that inflated the overall bond yield, creating an arbitrage windfall that was diverted to a transaction promoter, according to the IRS., The case, which provides a rare inside look at the anatomy of an allegedly arbitrage-driven deal under IRS scrutiny, marks only the second time that a dispute over the disgorgement of bond proceeds to pay closing agreement or arbitrage rebate costs has resulted in a lawsuit, according to sources., The Manitowoc CDA sold $145.4 million of Series A and B bonds on Aug. 1, *2002-, to fund loans to the Great Lakes Training and Development Corp., a Sheboygan, Wis.-based nonprofit organization, for multifamily rental housing projects. Also sold were $4.6 million of subordinated Series C bonds, which were privately placed and carried the 30% interest rate., The IRS believes an unidentified transaction promoter collected arbitrage earned from the investment agreement, since the Series C bonds' unusually high yield inflated the overall bond yield, the agency told Manitowoc in a January 2005 audit-opening letter., Stinson Morrison Hecker LLP was bond counsel on the deal. Bergen Capital Inc. underwrote the Series A and B bonds and Gold Capital Markets, an affiliate of Gold Bank NA, underwrote the Series C bonds. U.S. Bank of St. Paulwas trustee., Sale proceeds were to be invested in a guaranteed investment contract with Bayerische Landesbank, according to offering documents, but ultimately none of the proceeds were loaned to Great Lakes. Gold Bank purchased the unrated Series C bonds and received a placement fee of $150, 000 for placing them with Gold Capital Management, risks associated with the purchase, according to court documents., The Series A and B bonds were optionally redeemed on March 7, *2005-, and U.S. Bank announced that the Series C bonds were in default that spring. Over a year later, the IRS sent a revised proposed adverse determination letter to the Manitowoc CDA, stating that it had closed the examination and determined that the entire issue was taxable for two reasons, according to the court., First, the IRS said, the bonds failed to comply with several requirements of federal tax law because they were part of an abusive arbitrage scheme. Alternatively, the CDA failed to rebate arbitrage earned on the bonds to the federal government, and such rebate was never paid, according to the agency., It is not clear whether a rebate payment would cure the transaction's taxability. The IRS has not made a final determination and its two conclusions cannot stand together, since no rebate would be due on bonds that were deemed to be abusive arbitrage bonds., Great Lakes filed a proposed order with Minnesota's Ramsey County District Court last week, arguing on behalf of the Manitowoc CDA that the remaining $1.9 million of bond proceeds should be used to pay to the IRS any punitive costs to preserve the tax-exempt status of the issue., Great Lakes argues that the bonds' indenture, when read as a whole, indicates a clear priority on the preservation of the Series A and B debt's tax-exempt status over payments of interest or principal to Series C bondholders., This structure ... was set forth in not just one, but four contract sections of the indenture, Great Lakes said in its proposed order, It is undisputed, however, clearly excessive, and part of a scheme to divert arbitrage earnings, the conduit borrower said., The equities in this matter favor use of the account to preserve the tax-exempt status of the [Series A and B bonds], rather than to make additional payments to the [Series C] holder, who was involved in the structuring of not only this transaction, which the IRS has challenged as 'one of the most abusive arbitrage schemes seen by this office in recent years, ' but two similar transactions in other states, Great Lakes said., Marshall & Ilsey Bank, successor to Gold Bank and holder of the Series C bonds, does the indenture authorize the trustee, or any other party, to pay rebate or closing agreement costs, the bank said in a Sept. 6 filing with the court., The court, presided over by Judge Margaret M. Marrinan, will next weigh the parties' positions and make a judgment, according to sources that wished to remain unidentified yesterday., A call to the Manitowoc authority was referred to Mary Gassmann Reichert of Bryan Cave LLP in St. Louis, the authority's tax controversy representative before the IRS. Reichert was unavailable for comment, and calls to the two banks and Great Lakes were not returned., The IRS is not a party to the court action, which is extraneous to the agency's audit of the bonds. Charles Anderson, field manager of the tax-exempt bond office, declined to discuss the examination but did say he would not be surprised to see a jump in similar court actions because the IRS is making an increased number of rebate demands., It's something the IRS has been trying to do, [it] has been trying to allege a rebate obligation in a number of cases, one attorney commented yesterday., The Manitowoc court action is the second of its kind, telephone book, deals. In those nearly identical blind-pool multifamily housing transactions, hundreds of projects were listed in offering documents but no borrowers were identified and bond proceeds were never loaned out., The IRS has told the Manitowoc CDA that its deal and two nearly identical, contemporaneous transactions resemble those scams. Gold Capital Markets was underwriter and Stinson was bond counsel for the two other transactions, also totaling $150 million each, done by Lee's Summit, and the defunct Oklahoma Housing Development Agency in 2001 and 2002., It is also unclear if the IRS is pursuing other penalties against the parties to the Manitowoc deal. Gold Bank paid $3.5 million to the agency last October to settle a related investigation, and that settlement protected the bank and former employees from Section 6700 penalties, which are applied to participants in abusive transactions. In an Oct. 19 filing with the Securities and Exchange Commission, Gold Bank announced it had recovered $4.6 million in claims against Stinson and BancFirst
Published in Bond Buyer (2006)
Get additional information online
E-Article
20
by Nicole M. SmithThe economy expanded at a faster clip in the second quarter than previously reported, growing at a 2.9% rate, the Commerce Department revealed yesterday in the second of three views of the economy's second-quarter performance., Real gross domestic product - the broadest measure of the economy's performance - still grew at almost half the first-quarter rate of 5.6%, estimate of second-quarter performance released last month., But yesterday's 2.9% headline figure was still below IFR Markets' prediction of 3.1%. By comparison, however, real GDP grew at a 1.7% rate in the fourth quarter of last year., The preliminary chain-type price measure of gross domestic product registered a 3.3% increase, unchanged from the advance estimate and the first-quarter rate, and matching the IFR Markets' projection., Meanwhile, the preliminary implicit price deflator was also unchanged from the advance estimate, unchanged from the advance estimate, compared to a 2.0% rise in the first quarter., The core PCE index, which excludes food and energy, rose 2.8%, downwardly revised from the 2.9% figure in the earlier estimate, following a 2.1% gain in the first quarter data., The price index for gross domestic purchases, which measures prices paid by U.S. residents, rose at 4.0% in the preliminary data, the same as the advance figure, and followed a 2.7% rise in the first quarter., Excluding volatile food and energy prices, the price index for gross domestic purchases expanded 2.9% in the second quarter
Published in Bond Buyer (2006)
Get additional information online
E-Article