Henry’s Analysis of the Judicial Center Bond

Well, it’s time I dusted off my Master’s in Finance from Rollins College (shameless plug – we were rated Internationally the 59th top Finance program by Financial Times – not too bad!!)

Here is the link to the actual bond issued:  Okaloosa Bond Issue

If you are not familiar with municipal bonds, typically they pay below market rates because there is a tax exempt status which offsets the lower yield (or payments). I became curious why this bond had such a high rate of return while it still had a tax exempt status. And low and behold, right on page 11 of the document I found the Build America Bonds (BABs).

This is a program that the Federal government (aka “taxpayers”) has been sponsoring under American Recovery and Reinvestment Act (ARRA) this year (will go on till 2011 by the way) where they (we) subsidize 35% of the interest paid. the subsidy could be to the issuer or the bondholder but either way it makes financing easier and cheaper for the municipality. After the significant market disruption in 2008, along with all the other stimulative measures Fed has taken with, this is one of the ways they have been trying to help local and state governments out. This issuance is one of those deals.

The county is taking advantage of this tool to access cheap financing for the construction. This is the beginning, in my opinion, of a municipal bond bubble, nationwide. When the Federal government inserts money into a market place (think of Freddie/Fannie) it encourages behaviors that the markets should discourage or regulate. As such, we will have to be diligent and seek where bonds will be issued in the future. Expect a call of “but it’s cheap financing” from municipal governments to justify increased spending. Think “School Board” asking for more.

But back to our judicial center, I found and attached the official statement of the bond issuance. It is a total issuance of about $27mm, but ~$3mm tax-exempt portion of it matures between 2011-2015 and pays significantly lower on those terms (check the yields per cusip ranging from 1.1%-2.5% per maturity).

The maturities on the rest of the issuance (~$24mm – these are the taxable BABs) range between 2016-2039 (you can see the schedule on the attached document also) and yields anywhere between 4.25%-6.55%… So the calculation of the interest expense is not as straightforward as one might think..

The OS attached also shows you the sources and usage of the funds. on page 12 if you want to check it out.

Page 13 shows the total interest and principal that will be paid on the whole issuance over the next 30 yrs ( ~$56mm) and also the amount of direct gov’t subsidy ($10.1mm). Total debt service requirement column on that same page show how much cash the county would need to service this debt each year.

On the early payment issue, not all of these are callable that soon to begin with (but of course the scheduled maturities will come up in time and those will be paid back over the years) but the longer maturities are not callable till 2019… If they pay it all off in 10 years, which they would if they had excess cash they could save the ~$17mm in interest that was scheduled for the remaining part of the term… or if they could find cheaper financing at that time (more market rates driven than anything else) then they could refinance themselves by paying these off and issuing a new set of bonds (unless it’s prohibited by the official statement – I didn’t check).

So there you go!


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