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12-04-2012, 04:24 AM
OthmarAmmann's Avatar
Join Date: Jul 2010
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Originally Posted by barneyg View Post
everytime those news pop up we inevitably see a bunch of references to bankruptcy. I want to stress that bankruptcy is still very much a low-frequency event, even in these times, and that there are large US cities whose bonds currently have similar ratings (Philly's debt is also A2). the first-order impact of rating downgrades, as mesamonster correctly pointed out, is the increased cost of borrowing, which makes any long-run projections dicy. in figurative terms, in the past 3 years the COG has gone from Platinum cardholder status to "don't worry, you can still borrow from the corner bank" to loan shark territory. bankruptcy is still a very uncertain prospect but next week's bond issue will show how bad things can become.
I still always come back to the busted general obligation bond issue in January.

Unfortunately the offering memorandum is not posted on Glendale's finance webpage. However, given their trouble in marketing this small refinancing deal indicates that the market sees them as a greater default risk than does Moody's or S&P. Indeed, credit ratings are meant to be relatively stable through the credit cycle when compared to approaches that incorporate market views.

Even raising yield 20 bps, which is a very significant amount in the current interest rate environment, they were unable to issue any of the longer duration debt. This is ridiculous given the yield starved investors out there. Ultimately it is the market's view of default risk that matters, since it is the market participants rather than the rating agencies who provide the city funds.

It will be interesting to see how their 12.12.12 GO and excise tax bond issue goes, especially whether they can issue at an A spread versus BBB or worse. I would not be surprised if the latter were to come to pass.

So to default risk: I agree that it is still a remote likelihood, but it is clearly less remote than it has been in the past. Default rates do increase exponentially rather than linearly however. (For those who are interested, historical default rates are on page 11 investment grade municipal bonds have a 0.08% default incidence while speculative grade - or BB and below - have a 7.94% default incidence... of course experience for 2012+ may differ from the 1970-2011 period)

I am concerned about strategic default risk, especially considering that a significant amount of their financial obligations would be related to the direct subsidy of a major league sports franchise. Muni market participants in general have become more concerned about strategic defaults.

I am also concerned about their pension and OPEB obligations. At the end of FY11 they were very significantly underfunded and I doubt there will be any significant funding anytime in the next five years. In five years however we will be well into the baby boom retirement, so those funds will begin to experience significant cash outflows. I think it's quite possible the city will have to choose whether it will walk on the hockey subsidy or its retirees.

Why I'm especially interested in this year's financial report is to see the obligation for post retirement medical benefits. These wee last valued in FY09 at just over $100 million, completely unfunded and off balance sheet (Glendale is no different than any other municipality in this regard... all municipalities were forced to value these obligations for the first time in 2009). I believe they have to revalue them again in FY12.

It looks like there could be a lot of action for Glendale this December. Unfortunately I'm quite busy at work right now

Originally Posted by aqib View Post
oh really? That comes up from time-to-time, what are they planning/discussing now?
Removal of muni's tax exempt status is one of the ways that has been proposed to raise revenue in the "fiscal cliff" discussions.

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