Columbia on sidelines during refinance rush

January 10, 1994|By Adam Sachs | Adam Sachs,Staff Writer

For the past few years, plunging interest rates have sent many Maryland governments back to the bond market, refinancing long-term debt and saving millions for taxpayers, say public finance experts.

"It's just like homeowners refinancing mortgages. This is the time to refund debt," said Larry Shubnell, Legg Mason's senior managing director of public finance. "We're at a 20-year low. People want to get out of high interest rate bonds and into low interest rate bonds."

But the private, nonprofit Columbia Association has been left out of the refinancing rush, which has attracted "virtually every jurisdiction in Maryland," said Kevin Quinn, managing director of public finance at Alex Brown & Sons, a leading underwriter.

Robert Krawczak, the association's finance director, said the association has been told by its bond counsel that it can't refinance about $75 million in long-term debt at today's lower interest rates because of contractual obligations.

The association will spend about 28 cents per $1 of income -- including annual property charge revenue and recreational facility fees -- on interest expenses this year, Mr. Krawczak said. That's down from 36 cents in 1985, after which the association began operating at an annual surplus rather than a deficit, he said.

By comparison, the City of Frederick spent about 12.7 cents for every $1 of income on debt service last year, said Gerry Kolbfleisch, that city's director of finance.

The association, established by the Rouse Co., Columbia's developer in 1965, accumulated debt rapidly in its early years to build pools, health clubs and other facilities and address operating budget deficits for the unincorporated new town of 80,000.

Nineteen association bond issues totaling $93 million since 1973 included "no-call" agreements that prohibited the debt from being restructured before maturity. Interest rates averaged 9.56 percent in the 1970s, 14.55 percent in the 1980s and 9.37 percent in the 1990s.

The "no-call" provision offers protection to bond investors in return for a lower interest rate.

"The corporation needed additional financing, and that was a demand of the bondholders. It's not an oddity," Mr. Krawczak said.

Governments with solid credit ratings have been borrowing at rates as low as 5 percent or less. Carroll County refinanced about $41 million at a 4.94 percent interest rate in November, saving $1.2 million.

Maryland governments typically include provisions in bond sale contracts allowing them to call and refinance debt, say investment bankers and government officials.

Refinancings common

Mr. Quinn said about 75 percent of current government activity in the bond market is refinancings.

Mr. Krawczak said that according to the Piper & Marbury opinion, even if Columbia incorporated as a municipal government, the association would be unable to refinance at municipal rates -- lower than those offered at private enterprises -- because of contractual agreements.

"Things are always subject to further interpretation," he said.

The Columbia Council, the association's board of directors, has not released the legal opinion.

Advocates of a change to a public government for Columbia have cited the opportunity to refinance debt at municipal interest rates as a prime reason for establishing the unincorporated community as a municipality or special tax district.

A citizens panel studying Columbia's governance advised in 1992 that about $25 million in association debt could be saved by refinancing at municipal rates, an estimate that has been disputed.

Columbia Councilman Chuck Rees, an advocate for public government, said bond counsel's opinion didn't address the potential to save millions on interest expenses for borrowing if Columbia had tax-exempt status as an elected government.

Corporations without tax-exempt status, considered a more risky investment than governments, must borrow at interest rates that are about 1.5 to 2.5 percentage points higher than government rates -- and can be even higher depending on credit ratings -- say public finance experts. For example, the association issued $15 million in bonds in fiscal 1991 at a 9.65 percent interest rate, while the City of Annapolis borrowed $5.9 million at 6.47 percent in the same year.

A 2-percentage-point difference in interest rates could result in up to $4 million more in interest over 20 years on a $10 million bond issue.

Mr. Rees said yesterday he's not satisfied that Piper & Marbury thoroughly explored all refinancing options, adding that he couldn't reveal his specific concerns because the legal sessions are confidential. At his urging, the council scheduled a private session with Piper & Marbury Jan. 24 for clarifications.

"Eventually this is an issue that will have to see more public light," said Mr. Rees, who is an attorney.

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