Rising rates shouldn’t scare off issuers


Cities and states should “keep calm and issue bonds” despite sticker shock from rising interest rates and a volatile municipal bond market.

That was the message from panelists speaking Thursday at the Government Finance Officers Association’s annual MiniMuni event, a three-day online event for issuers.

The rise in rates “makes our jobs as debt managers that much trickier and that much more painful,” said Paul Chatalas, capital markets manager for the state of Illinois.

But there’s a silver lining, Chatalas said.

“Volatility creates opportunity for the investor and opportunity for the investor is not necessarily bad for the issuer,” he said. “Fundamentals still apply, just as much now as they do in easier times. So, keep calm and issue bonds.”

Matt Fabian, partner at Municipal Markets Analytics Inc., said despite higher borrowing costs, governments need to be thinking about long-term needs like climate change, which will require accessing the capital markets.

After a decade of low rates, the recent rise in rates appears dramatic. But in fact yields now hover at about the average over the last 30 years, said Dan Hartman, CEO of PFM Advisors.

“No one really wants to time the market – that’s not the right strategy or right policy to think you’re going to be able to time it,” Hartman said.

“Have a solid plan, look at the long term,” he said, adding that call options are “always a benefit.”

Rising construction costs and lingering supply chain disruptions may “outweigh the rate considerations,” he added, and argue for “going sooner rather than later.”

Playing with size and structure can help offset high borrowing costs, panelists said. Offering larger deals as well as bonds that mature earlier in the yield curve can help attract more investors, Chatalas said.

The decision to issue tender bonds, as opposed to a straight refunding, will probably remain popular as long as rates remain elevated, panelists said.

“Issuers should really be considering tenders,” said Matt Fabian, partner at Municipal Market Analytics. “It’s a good trade – it benefits the borrower and the lender and the underwriter, and there’s no reason to think that won’t continue,” he said. In the future, outstanding taxable Build America Bonds may be able to be converted into tax-exempt debt, he added.

The San Francisco Public Utilities Commission saved $85 million with a recent tender, said Nikolai Sklaroff, the commission’s capital finance director.

“It was great to be able to deliver these savings in a market where interest rates were going up,” Sklaroff said.

But he cautioned that the deal required more time and effort than a traditional financing, and that it’s important to “really weigh your team, your advisory team as well as your banking team, very carefully.”

Compared to a regular refunding or new money deal, the tender required a high level of administrative time and work and attention to detail, Sklaroff added.

Over the long term, cities and states are going to need to float debt to finance climate change mitigation, Fabian said, predicting that volume will start to “ramp up dramatically” starting in 2026 and 2027 due to climate needs.

“You’re the ones that are going to have to finance the bulk of our country’s adaptation,” Fabian said. “So, you should think about getting in front of this.”

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