February 23, 2009 / 11:20 PM / 9 years ago

Small muni borrowers struggling to sell debt

MIAMI BEACH (Reuters) - Small U.S. cities, rural counties and other lesser-known borrowers are mostly shut out of the $2.7 trillion municipal bond market and need federal help to spur infrastructure and other job-creating spending.

Elected officials and financiers told a conference on Thursday that, despite a months-old rally in top-rated munis from blue-chip entities, tens of thousands of U.S. school districts, housing-finance agencies, towns and others face high interest rates and weak investor interest in the same tax-free market.

“If you are a small issuer and have a news story about a revenue reversal or a closing factory, the market disappears,” said Bob Inzer, a member of a commission on local borrowers and clerk of the circuit court in Florida’s Leon County. “No one will accept that risk.”

Small governments and other tax-free borrowers with less than “AA” ratings by Wall Street credit agencies are delaying road building, facilities renovations and other spending that would employ Americans because interest charges are too high, Inzer said.

“Spreads for small issuers are very wide,” Inzer said in an interview at a conference held by The Bond Buyer newspaper.

The yield on a top-rated “AAA” 10-year bond in secondary market trading now stands at 2.90 percent, with lenders requiring only 15 basis points more for an “AA” issue.

But yields on an “A” rated issue are 4.18 percent and 6.21 percent, or an eye-popping 331 basis points more for a “BAA”-rated bond than on an “AAA” bond, according to Municipal Market Data.

Other capital for small borrowers is scarce too, with small governments and agencies facing re-up fees on letters of credit that are 10 times their initial cost, according to Inzer.

Local governments caught up in the U.S. recession may have to cut budgets by $250 billion this year and need help in tapping the muni bond beyond the sweeteners included in the stimulus law signed by President Barack Obama, U.S. Rep Gerry Connolly, a Virginia Democrat, told the conference.

Connolly said in a video address that the federal government should look at helping to create or support bond insurers, which have been mostly missing from the muni market for the past year because of the global credit crunch.

Bond insurers stand behind debt from lesser-rated issuers and had allowed small borrowers to pay lower interest fees.

The local borrowers commission, which was led by Inzer and organized by the National League of Cities, advocates creation of a mutual guarantee entity to back municipal debt and revive investor confidence in lesser-rated debt.

Inzer said the proposal would require a federal capital infusion but would involve risk assumption by other municipal credit bodies and will get closer attention from federal policy makers now that the president’s stimulus plan was law.

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