Thursday, January 29, 2009

Renderings of new Nashville Convention Center show Karl Dean as heartless as his mentor; credit markets will require too much cost for bonds

Nashville government officials released renderings today of the proposed $600 million convention center amid a deep recession and severe budget deficits -- making the drawings about as possible as anything drawn for the Star Wars movie series or Jabba the Hut fitting into a thong.

And with city public schools a few months away from state control due to failure to meet No Child Left Behind Act standards after five years, the drawings represent an incredible immorality on the part of Mayor Karl Dean -- who learned his people skills and sense of humanity from his mentor Phil Bredesen.

That money, even if can bonds can be sold in the current frigid credit markets, should go to schools, teacher salaries and classroom resources. For God's sake, these are our children. Or do you need Whitney Houston to sing another verse?

The mayor proposes to pay for the 30-year bonds to finance the monstrosity with fees and a tourist tax. Sorry, Karl. But with Nashville's fiscal condition, the credit markets are going to demand very high interest rates for any bonds here.

And a city council member very informed on Muni and general obligation bonds and the credit market wrote me to say the following in disagreeing with my optimism(yes, me optimistic, the irony):

Enjoyed your post on problems facing Nashville and I found it interesting. Since you seem interested in the capital markets, I thought I might share with you some thoughts that may be helpful in your analysis going forward.

The municipal bond market is not going to collapse because it already has.

Beginning with the downgrades of the bond insurers, the market has faced unprecedented challenges. After the exit from the market of bond insurers we had a collapse of the auction rate debt, the banking crisis meant a loss of letter of credit providers and huge problems for variable rate debt issuers.

The rise in short term interest rates forced sell-offs in something called the TOB's programs of the major retail shops like Merrill Lynch so the secondary market was flooded with product. The typical buyers - insurance companies, mutual funds - could not absorb the supply and that forced rates up even more which in turn created more sell-offs.

Those challenges have essentially re-wound the clock to about 1985. We had a pretty healthy and operating market then and returning to it will be painful but not catastrophic. Some would actually argue that it is a good thing.

As in 1985, we are looking at a period without third party credit enhancement - bond insurers, letters of credits, etc. We are are also looking at an era where the buying universe is constrained to a few institutional issuers and the retail market. Because of these two significant shifts in the market we can expect a couple of things: higher interest rates (not just in nominal terms but as a spread to taxable and treasury debt) and higher costs of issuance.

On the bright side, municipal bond issuers enjoyed an unprecedented 20 year run with low interest rates and low costs of issuance. They also had access to tax exempt financing for projects whose economic viability was marginal. Some think we shall quickly return to that period and are trying to wait it out by holding off on any new issuance. I disagree and think we shall be years getting back to the market of 2005 - if ever.

The bottom line is that Metro will not be able to afford the cost of issuing and paying bonding debt on a $600 million project. If it can issue the bonds at all.

That makes the renderings more valuable than the project will ever be. There will be no new convention center. The economic and credit market times will not allow it.

Perhaps Mayor Dean can ask the mega-millionaire Gov. Bredesen for a loan.

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