Saturday, January 30, 2010

AAA credit rating

Thanks to an anon commenter on this post for pointing me to Jefferson County, Alabama, who used their AAA credit rating to borrow money and screw themselves very badly.

Jefferson County, Alabama, had $3.2 billion of bonds slashed to below investment grade by Standard & Poor's, putting it at the center of turmoil in the U.S. municipal bond market that has driven up borrowing costs.

The downgrade, made after the markets closed on Feb. 29, came after the county, which includes the state's biggest city of Birmingham, said it may be unable to pay banks holding floating-rate debt for its sewer system or make payments on related interest-rate swaps. Jefferson County, with $193 million in sewer reserves, faces the prospect of having to pay more than $1 billion to banks to buy back debt and unwind the swaps.

And later...

After the insurers' ratings were cut from AAA in January, rates on the county's debt soared to as high as 10 percent when dealers failed to find buyers for the debt or use their own capital to purchase the securities. The county said it paid $6 million more in interest on its sewer debt in the four months ended in January.

Compounding the problem, interest-rate swaps the county bought to shield it against rising borrowing costs have backfired. The floating rates it pays on its bonds have climbed while the variable rate banks pay the county under the agreements have declined, pushing interest costs higher.

The county, in a notice to investors on Feb. 28, said it could ``provide no assurance'' that revenue from the sewer system would be sufficient to pay its increasing debt costs. The disclosure prompted S&P to lower the county's sewer debt by six levels to B, five steps below investment grade, and keep the bonds under review for possible further downgrade.

Beware of anyone who wants to leverage our public finances in the midst of an economic crisis.


Anonymous said...

What, like Basu, the oft quoted "expert" who advised recently for the government to "borrow as much as possible"?


Anonymous said...

advisors make fees off of deals like these...not $50, more like $50k. Transparency, transparency...Bloomberg has written a series of articles regarding this topic (municipalities, financial advisors, and fees).

Eludius said...

Shame on the underwriter for failing to advise them properly about the issue. Not being able to sell the debt is clearly the underwriter's fault.