Here’s a novel idea for municipalities: ignore the prickly muni bond market and accept help from your local Wall St bank.
From the WSJ on Wednesday:
J.P. Morgan Chase & Co. is devoting billions of dollars to direct loans this year to both refinance deals and for new projects, according to a bank official. Last year, the bank made a few hundred million dollars of direct loans to municipalities. Now, the bank would consider making a single loan for hundreds of millions of dollars, the official said. It also is dispatching teams to explain the concept to wary public borrowers.
These loans are sometimes at lower interest rates than municipalities would have had to pay through public offerings, and there are no pesky legal and underwriting fees.
But not always — and this might not be the win-win situation it appears at first glance. From the article:
In other cases, the loans are aimed at helping public borrowers, for a price, out of a squeeze that banks helped create. During the financial crisis a few years ago, many public borrowers floated bonds backed by bank guarantees called letters of credit.
This year, about $53 billion of those letters of credit are expiring, according to Thomson Reuters. Municipal borrowers struggling to refinance this debt face tough new terms and interest rates at banks.
As the FT reported back in December, these letters of credit (aka variable rate demand obligations) present a risk for municipal borrowers in 2011. This is a hangover from when municipalities ditched monoline-backed securities for short-term bank support.
It looks as if banks are gearing up to take advantage of the upcoming expirations and funding squeeze (along with the small matter of increasing volatility and costs for borrowers in the market).
For borrowers, this could also help avoid the move toward greater disclosure — just when the light seemed to be shining a bit brighter on the market.
What the Lord giveth, etc.
Related links:
US munis face ‘growing credit risk’ – FT
Regulators and hedge funds in muniland – FT Alphaville
Meredith Whitney and the muni fifth dimension – FT Alphaville