Super Hot Allentown Arena Bonds Sell Out in 4 Hours

Not sure how these bond sales normally go down, but Scott Shearer of PFMG seems to think this is impressive:

You might think of the deal like your own 30-year mortgage. Investors lent the project $224 million by buying bonds. The arena authority has to pay that back at 4.77% interest. That brings the grand total to more than $444 million over the 30-year loan.

While that may sound like a lot, it’s actually less interest than the city expected. It got a better deal because so many investors wanted in.

“There were more investors than actual bonds available, and that allowed us to lower the interest rates even further,” said Scott Shearer with Public Financial Management Group, who is advising the city and its arena authority on the deal.

In fact, demand was so high, the project got an extra $8.5 million for free — a premium investors paid to get on board.

(Thanks: WFMZ)

Comments

  1. GDub says:

    Of course selling the bonds is better than not selling them, with reference to the project.

    However, this is an example of how local press gets distracted when they don’t understand the basics of municipal finance and can’t ask the right questions.

    In today’s climate, a bond paying that interest rate is extraordinary, which goes a long way to explaining the demand. It might have been possible to do a google search or make a phone call to see what similar bonds offer.

    • correct, geetings thinks the speed indicates faith in project. in reality, the high rate reflects the opposite. a couple bond houses simply were chasing that rate, most likely to boost a fund average.

    • Jon Geeting says:

      I dunno I thought Matt Assad and WFMZ’s articles did a pretty good job explaining that the higher interest rate was a function of the higher risk.

  2. Publius says:

    The rate, by the way, was like 4.75%. Now, I grant you that might be a little high by 2012 rates, but, historically, it is as cheap as a municipality is ever going to get money.

    http://www.mcall.com/news/breaking/mc-allentown-pa-arena-bonds-20121002,0,6750290.story

  3. jon, what was the purpose of your post and headline? it seemed to suggest enthusiasm for the project, instead of the high return the unusually low rating necessitated.

  4. John says:

    It’s always entertaining when people so staggeringly misunderstand what just happened.

    Jon, these bond yields are high because there is a lot of risk in this project. To think for one second that the investors are getting a steal shows a complete lack of understanding about how the bond market works. Your headline is intentionally misleading – guess you hope there are more people like you that only read headlines.

    Spend some time reading up on the junk bond bubble – investors are desperate for yield and are chasing pretty much anything with a pulse.

    It’s great for Riley, who will makes tens of millions in profit and take it all back to Saucon Valley, and great for Pawlowski who will ride off in victory formation. The jury is still very much out for Allentown and the Lehigh Valley. That rate is a ringing alarm on this thing.

    • Jon Geeting says:

      I’m not misunderstanding anything. It’s a higher rate because the project is higher risk. The sale wasn’t a flop, and it was a better rate than the city was expecting. What’s misleading?

  5. Mitchell says:

    I love how the Browne continuously says that these bonds are investment grade bonds. Yes they are, but they are junk investment grade bonds, now sitting in high yield mutual bond funds. I am pretty sure if you own any sort of high-mid yield bond mutual fund, you now own some of the these issues. Investment grade does not mean safe…it means that brokerage houses/investment companies can invest in them. They are sitting in higher risk mutuals now.

    Although i am not 100% positive, i believe that the 4.75% interest rate on the A series of bonds is at a TAX FREE rate, not a taxable rate. That i believe is why there are two issues, a tax exempt and a taxable issue. If the 4.75 is tax free, that is extremely high in this market for tax free issue and really shows the creditworthiness of this project.

  6. FutureDowntownArenaAttendee says:

    Jon’s point is this… all along the way all the naysayers have been wrong. They said that the property owners would drag this out in eminent domain proceedings, Wrong. They said the law would get shot down in court, Wrong. They said that no investor would purchase these bonds, Wrong…. To all the naysayers… when have you been right? Seems like you are batting .000 .

  7. GDub says:

    Again, this isn’t a question that can be answered in a binary “fail/succeed” kind of way, as FDAA tends to indicate. And its not really a question of being a “nabob”.

    The question isn’t “would the bond sale fail”. No underwriter is going to deliberately offer a product that won’t be bought. The city had to offer a low-grade bond at a very high interest rate to generate enough capital to start the project. So in our “yes/no” world, the project “succeeds.” A more sophisticated way of looking at it may be to ask–how does Allentown’s deal relate to other similar deals? Did any of those deals run into repayment problems? Why? Is the opportunity cost of devoting so much revenue to interest payments going to have an impact on other aspects of the project–rebuilding transportation, policing, basic services, etc. We get none of that.

    Or, you could even possibly say that the project “failed” to convince investors that the project is of average or below risk.

    We do however get “enthusiasm” from Mr. Shearer, who, as the article notes is “with Public Financial Management Group, who is advising the city and its arena authority on the deal.” Noting that the interest rate is higher because of risk is about 10th grade economics, and not particularly laudable.

    There is little attempt to round out the story with analysis or by getting views of financial professionals NOT employed by the city. I’m not saying Jon’s conclusions are wrong (though I suspectthey are) but you’d never know either way from this article. Its a shame that the MC doesn’t give journalists the time or guidance to look at serious urban issues in depth.

    I seem to recall that 30 year interest rates these days have a “high” band around 4.50 percent, so Allentown may be above that. The 8 million is the equvalent of gett

    • Jon Geeting says:

      I guess I just don’t really get what people are wanting to disagree about. It all sounds like a lot of throat-clearing to me. It’s a high rate because Allentown’s downtown is in pretty gritty shape, and arena projects are risky. It’s a risky project. But it’s not so risky that investors didn’t want to buy the bonds, as many of the critics were predicting, and there actually turned out to be somewhat higher demand than the city was expecting.

      • GDub says:

        Jon,

        There’s lots to disagree about. My main complaint is the poor quality of the journalism which takes active steps to avoid questions politicians may find inappropriate or annoying.

        1. Does the MC want to be a part of the debate as a public watchdog or just rehash talking points? Quoting a paid advocate of a bond sale and just putting a weak disclaimer on it is poor journalism.

        2. If we’re going to talk about public policy, lets talk about it like adults. “It didn’t turn out as badly as some people thought it would” isn’t really an objective way of evaluating a project. How about some historical benchmarks or other testable standards?

        3. No one seriously thought the bonds wouldn’t sell, exactly because the underwriters do research on what interest rate is needed to move them. Very few bond sales don’t sell because that work is done. However, if they offered the bonds at 2%–surely they wouldn’t have sold. So what’s the sale proving?

        If the project is risky, what’s being done to mitigate risk? What’s the impact on the financing of the project to devote significant funds to interest rate payments instead of building or providing public services?

        Every time this administration gets pinged on a question, the typical response is to make a powerpoint slide and talk about how much people will like hockey. Doesn’t exactly instill confidence.

  8. GDub says:

    I seem to recall that 30 year interest rates these days have a “high” band around 4.50 percent, so Allentown may be above that. The 8 million is the equvalent of getting a toaster with your car loan.

    • Mitchell says:

      @Gdub: Regarding the interest rate, that is the point i was trying to make earlier. A 4.7% rate that is tax free may have an effective rate of 6% to the lender for the simple fact that he/she is not paying taxes on this yield.

      6% in this market with these rates are at the very high level and are driven by the amount of risk seen by the investors. If this was a slam dunk project like Browne/Pawloski/FDAA are maintaining, this interest rate would be substantially lower as the perceived risk would be less.
      However, the professionals in the market (not just the armchair blog commentors like you and I) are noting that this project is not a slam dunk (due to many factors probably not associated with this project) and are pricing the risk accordingly.

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