LAW  REAL ESTATE  FINANCE
DailyBusinessReview.com
OCTOBER 29, 2008
credit crisis
Projects on hold
Municipal bond defaults, Lehman Brothers bankruptcy
make it difficult for public sector to secure financing
V
olatile demand for
municipal bonds
nationally has disrupted borrowing
by South Florida public
agencies and may portend
bigger challenges in government finance.
A surge in municipal
bond defaults has combined with problems
among bond insurers
and the bankruptcy of
investment banking giant
Lehman Brothers to make
public sector finance more
cumbersome.
Municipal bond defaults
across the nation jumped
from January through
September to $2.44 billion
from $324 million for all
of last year, said Richard
Lehmann, president of
Miami Lakes-based Income
Securities Advisor.
Lehmann said the widespread credit crunch could
expose weaknesses on
municipal balance sheets
including “horrendous
unfunded pension liabilities
that states and municipalities have incurred over that
last 10, 20 years that they
don’t have the means to
pay.”
Even for public agencies
with good credit, volatility in the municipal bond
market has been disrup-
tive. Palm Beach County’s
public school system, for
example, has put off plans
to issue $110 million of
long-term bonds to finance
construction of an elementary school in Boca Raton,
another in the Royal Palm
Beach area and a Pahokee
middle school.
“We have postponed that
until the rates get more
reasonable,” said Leanne
Evans, treasurer of Palm
Beach public schools. The
county is legally barred
from issuing the bonds if
the likely interest rate is
above 6 percent, “and it
was until late last week,”
she said. Now the likely
rate is closer to 5.7 per-
richard M. brooks
by Mike Seemuth
Special to The Review
Adam Carlin said bonds issued by municipalities with solid credit histories may be bargains
at subpar prices.
This article is reprinted with permission from the Daily Business Review. © 2008
credit crisis
cent.
Palm Beach County’s
school system and other
municipal issuers also are
seeing rates on short-term
borrowings lower than several weeks ago.
“We’ve not had any
trouble issuing commercial
paper. The rate was a
little higher than what we’d
like for about two weeks.
But it’s back to a reasonable level now,” Evans
said. Earlier this month,
she said, “we had a week
where it was at 5 percent,
and we had a week where
it was 4 percent, and then
it dropped down to 2.4
percent,” the interest rate
at which the Palm Beach
County public school system last week refinanced
its commercial paper outstanding.
Improved conditions in
municipal credit markets
may be evidence that
government bailouts of
financial institutions have
begun to take effect. No
bailout was extended to
stop the bankruptcy of
Lehman Brothers, however, and the collapse of the
investment bank is hurting
municipal finances nationwide. Lehman’s Sept. 15
bankruptcy is the largest
in U.S. history, with more
than $600 billion of assets
under court supervision.
One victim is Pompano
Beach. The city invested
$130 million in a U.S.
government agency bond
fund run by The Reserve,
a New York City-based
money management firm.
A surge in redemptions
by investors in a separate
Reserve fund with direct
investments in Lehman
Brothers led the Securities
and Exchange Commission
to freeze withdrawals from
all funds, including the one
Pompano Beach invested
in.
“It’s still a pending situation,” said city finance
director Suzette Sibble.
The city expects eventually to recover its entire
Reserve investment, she
said, and there is no
immediate need to borrow
heavily in the municipal
bond market.
“Pompano doesn’t specifically have any projects
in mind right now that are
so critical that we do definitely have to go out to the
bond market,” Sibble said.
If that were necessary, “we
would have to pay higher
interest rates to attract
investors. … I think it just
comes down to a trust
issue right now. And unfor-
tunately, investors don’t
even trust the government
with everything going on.”
Michael Krul, an attorney with the law firm
Ruden McCloskey in Fort
Lauderdale, represents
another public agency
in Broward County that
has been left in financial
limbo by the collapse
of Lehman. Krul, who
declined to name the
agency, said Lehman
insured against any loss
on the agency’s investment in debt securities
and collected payment for
doing so.
“The way you deal with
it is you end up paying
again,” Krul said. “The
government goes out and
finds somebody else to
take the same risk and
loses the initial money we
paid to Lehman, and that’s
assuming we could find
such parties, which today
you probably can’t.”
For investors in municipal bonds, insurance
against loss has been a
popular feature in recent
years. But because leading bond insurers have
had their credit ratings
cut, bonds that were
issued with a triple A rating, the highest possible,
may have lost some of
their value.
“What has happened
now is, many of these
insurance companies that
were triple A are no longer triple A,” said Adam
Carlin, a senior officer in
the portfolio management
group at Smith Barney in
Coral Gables. “You need
to be looking at the underlying rating of the bond,
the rating the municipality
itself has.”
Bonds issued by municipalities with solid credit
histories may be bargains
at sub-par prices, Carlin
said.
“Right now there are
enormous opportunities
out there in the municipal
bond market,” he said.
“We’re looking at very high
quality, general obligation
bonds that are trading 90
cents on the dollar.”
Municipal bonds are
trading at discounts to
par value largely because
“there is so much fear out
there right now about how
this current economic situation we’re in will impact
the municipalities,” Carlin
said. “And these insurance
companies are no longer
in front of the municipalities saying, ‘It’s OK. We’re
here.’ ” 
This article is reprinted with permission from the Daily Business Review. © 2008