Tuesday, March 23, 2010

Free Money Squared

Ok.. we all know the city is looking for a big cash windfall from monetizing the Pittsburgh Parking Authority's assets.  Free money it might seem like.  The recent news is that there is a lot of interest in the 'market' for these assets, something that was beginning to become obvious some weeks ago.

Most anyone who is going to bid on the assets is going to borrow most of the money needed. What I just realized is that given how low interest rates are these days, it will be almost like free money as well for the bidders.  Big real assets with a virtually guaranteed revenue stream all but codified by statute will clearly securitize any borrowing and result in low low interest rates.   So almost anyone with the credit wherewithal might as well try this deal.  Borrow at virtually no interest rate, leverage the entire deal and it will require almost no cash, buy parking assets with the capital raised and anything coming in is itself like free money cubed.   No wonder demand is high.  It is in a sense the same dynamic as the low interest rate fueled real estate boom. 

Speaking of free money.  This all brings up another little second order effect of the recession.  Some may recall I kept harraunging on the variable interest rate bonds issued by the Sports and Exhibition Authority.   There was a scary period in late 2008 when those bonds spiked in interest rates which could have been quite a disaster all around if it had continued.  But the world didn't end and interest rates have collapsed all around since then.  Since then there has also been more disclosure of how the state is really backing those bonds anyway. 

Here's the thing though...    SEA issued roughly $280 million in bonds to pay for the arena.  Payment on those bonds to come from the state and the Rivers Casino.  The bonds were variable rate bonds, but no doubt the SEA has budgeted for a certain interest rate. They had to plan for something. Who knows what their internal budgeting was, but I'm guessing they were planning in the 3-4% range.

So the question then is, what interest rate are those bonds paying.  Public bonds, especially those guaranteed.. and the SEA bonds have both bond insurance and a now publicly known guarantee from the state (why you need both I still don't quite get) are getting some really really low interest rates these days.  I looked it up and the arena bonds have been paying between 0.14% and 0.23% since the beginning of the year.  The zeros and the decimal places are correct.  Basically the SEA's bonds are paying out virtually nothing in interest.  So $280 million in bonds... For sake of argument assume they budgeted to pay out at say 3.5% yet are only paying out at 0.2%.   You can do the math.  Let's just say I am wondering no more why we have not heard as much about revenue shortfalls down there which was a routine news story a couple years ago.  So we will file it all under the category of things that make you go hmmm.....


Blogger Bram Reichbaum said...

This info about low interest rates and the ability to borrow money cheaply for things like leasing parking garages ... what does this do to the Harris plan of retaining the garages, hiking our own rates, and taking out "revenue bonds" to fill the pension fund with the expectation of repaying the bonds with parking revenue? Good news there as well, making it a wash for both (all three?) options?

Tuesday, March 23, 2010 12:29:00 PM  
Blogger BOD said...

Does the city need to be on the hook for even more bonds?

Tuesday, March 23, 2010 2:23:00 PM  
Blogger C. Briem said...

I am not parsing any specific plan becasue I don't think any plan out there is very specific as yet... which includes the city's own plan.

but given that the city/PPA actually owns the garages they can securitize borrowing directly.. and have lots of other controls over parking downtown.. you would have to believe a revenue bond backed by the parking assets could be had at an extremely low interest rate.

Tuesday, March 23, 2010 7:12:00 PM  
Anonymous BrianTH said...

As long as the asset in question really has a senior entitlement to the revenues, it should command a higher price thanks to lower market interest rates regardless of the issuer.

So yeah, this does seem like a good time to be selling an asset like this (or issuing debt with these revenues offered as security, or however you want to structure economically equivalent deals).

Wednesday, March 24, 2010 8:06:00 AM  
Anonymous BrianTH said...

By the way, though, this is probably all the more reason not to grant leases (or securities or whatever) that are too long. You should be able to get a good price on something like a 20-year revenue stream, but it was already a problem that private entities would likely discount revenue past that point too much (as compared to a perpetual entity like the City). Add in the fact that the current low interest rate environment undoubtedly doesn't extend that far out, and I would expect the deal would become rapidly less favorable on a marginal basis as you added years on the back end.

Wednesday, March 24, 2010 8:12:00 AM  

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