WOONSOCKET â€” The deal is done, and the price isn't as bad as officials had feared. But it's still pretty bad: 7.125 percent.
That's the payback interest rate on the $11.5 million deficit reduction bond the city sold yesterday to Lord, Abbett & Co., a private investment management company headquartered in Memphis, Tenn.
â€śThis is very expensive money,â€ť said Finance Director Thomas M. Bruce.
Even with its junk bond rating, the city had been predicting a much better deal as recently as a couple of weeks ago. Bruce said all that changed quite suddenly when it became apparent that Lord, Abbett & Co. was the only investment house interested in buying the city's high-risk bonds, and its advisers knew the city needed to raise the money to keep from becoming insolvent.
Another twist made it the quintessential buyer's market for Lord, Abbett & Co. The bonds will essentially be used to refinance short-term notes in the same amount which Lord, Abbett & Co. also owns half of, said Bruce. The city has a week to satisfy those obligations.
While there was some pressure on Lord Abbett & Co to shoot the city an offer it could afford so that it gets paid, the company also had the leverage to push the price up because of the city's dire need for cash.
â€śIt's like buying a house,â€ť said Bruce. â€śIf you've only got one buyer and they know you've got a commitment coming up, they know you're not going to walk away,â€ť said Bruce. â€śThey have all the leverage.â€ť
The bond sale also comes at a time when investors are feeling quite skittish about municipal bonds, once considered a safe and profitable place to park one's assets.
Sure, the earnings are tax free, but the risks seem higher than ever as more and more cash-strapped state and local governments find themselves staring into the financial abyss.
See BOND, Page A-2
The high-profile story of Wisconsin, where the governor is telling public employees to choose between their jobs or collective bargaining rights, was making the point with a sledgehammer at the very moment the city's bonds went on the market, and that probably helped drive up the costs for the city, said Bruce.
The deficit reduction bond is part of a state-approved strategy the city has embraced to erase years' worth of accumulated budget deficits which have pushed it perilously close to insolvency and driven its bond rating into the basement. Bruce and other officials say it's the last best chance for the city to chart a course away from financial meltdown, since banks will no longer extend the city the short-term credit it needs to keep government running when cash runs low, as it typically does between tax collections.
To the taxpayer, Bruce said the cost of the deficit bond will be about $2.9 million for each of the next five years, until the bonds mature in 2016, including $420,000 a year in interest.
That onus would add another $1.30 on the residential tax rate if homeowners were forced to pick up the whole tab, but Bruce says Mayor Leo T. Fontaine is working on a plan to cut the figure in half with a combination of still-unidentified personnel cuts and new revenues in next year's budget.