Despite favorable bond ratings and near-record low interest rates, the city of Chattanooga scrapped plans to refinance $18 million of debt Wednesday and the Knoxville Utilities Board put off a planned $70 million wastewater bond issue.
The culprit is a part of the federal stimulus program designed to help municipalities during the downturn, but now it is overwhelming the bond market as it nears an end.
Government borrowers eager to sell federally subsidized Build America bonds before the program expires in December have flooded the market with nearly $30 billion of debt issues this month, according to Thomson Reuters data.
The program allows municipalities that rely upon tax-exempt issues to sell the higher-interest-rate taxable bonds and get a 35 percent rebate from the federal government to make up the difference.
"There are so many issues and prospective bond issues out there that the supply of bond sales overwhelmed the demand. That drove up the price tremendously to a point that it no longer made sense" to issue the bonds, City Finance Director Daisy Madison said.
Madison said this is the first bond issue the city has had to withdraw in modern times, though she hopes to issue the refunding bonds in early 2011.
Chattanooga's bond interest rate averages around 4.5 percent, Madison said. Bolstered by "a very strong" assessment of Chattanooga's finances and a favorable double A-plus rating from the Fitch Ratings service, the city had expected to issue refunding bonds at just more than 3 percent.
That would have saved the city about $2 million, but Madison said the city's budget doesn't depend on the issue.
In Knoxville, however, the city-owned utility needs to sell its wastewater bonds to pay for court-ordered stormwater and sanitary sewer improvements.
"The wastewater issue was probably too large given all the turmoil in the market," said Mark Walker, vice president of finance for the Knoxville Utilities Board. "I kept waiting for bids to come in on the issue, but they never did."
The utility was able to sell $30 million of bonds for its electricity division and $12 million in bonds for its natural gas operations.
Those bonds sold at what Walker said were "very attractive" net rates for KUB, ranging from 3.47 percent to 3.67 percent.