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Lightening the Debt Load at Ontario
Airport
De La Rosa & Co. served as Senior Manager on a 2006 refunding of all
outstanding debt at Ontario Airport by the City of Los Angeles’ Department of
Airports. De La Rosa spearheaded the effort to increase the airport’s
flexibility to define net revenues, its debt-service reserve fund, and swap
language. DLR also helped reaffirm its “A” rating and obtain aggressive bids
from the major bond insurers.
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President's Message
Finding Diamonds Close to Home
During Turbulent Economic Times
In the early 20th Century, the founder and first president of Philadelphia’s
Temple University became famous for a speech he delivered all over our growing
country. In “Acres of Diamonds,” Russell Conwell advised young Americans to
follow the examples of local merchants and business owners and seek
opportunities for success in their own backyards.
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BEN STERN'S MarketWatch
Treasury, Muni Markets Remain Quiet
Treasuries ended relatively flat after weeks of volatility. Market concerns remain focused on inflation, but bearish reports about investor confidence, housing and jobs are keeping interest rates down. On June 6, yields on the 2-year note closed at 2.37%. The 10-year note lingered around 4%, then closed at 3.91% after news of the steepest rise in unemployment in more than 20 years, with the economy losing jobs for the fifth straight month. Meanwhile, the 30-year bond closed at 4.62%. Fed Futures indicate a 62% chance the central bank will increase its benchmark rate by yearend.
Tax-exempt rates continue to move along with Treasuries in a fairly quiet market. Primary new issuance continues to be manageable and well received, and absolute yields remain relatively attractive. Although liquidity in the market has improved significantly, secondary municipal trading shows the market still lacks full efficiency. Investors continue to discredit most insurers and focus on underlying credits. Standard & Poor’s downgraded AMBAC and MBIA two notches to AA last week. We expect the market for high-grade Munis to continue consolidating as crossover buyers and retail continue to create sufficient demand for municipal paper, though a possible surge in supply from investors selling paper insured by AMBAC and MBIA could temporarily raise ratios.
Yields on high-grade, short-term, tax-exempt continue to drop as cash flows into money funds. The variable rate market appears to be consolidating as issuers continue to address solutions to their auction rate debt.
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Harnessing the Tiger in California's Gas Tanks
Innovative COPs finance critical
street repairs in Oxnard, Santa Ana, other cities.
The streets of Oxnard were going from bad to worse and the City Council was
ready to take action. The council directed city staff to address a backlog of
more than $100 million in repairs, keeping three objectives in mind: prevent
further deterioration by fixing the worst streets first; avoid dipping into the
General Fund; and borrow at the lowest cost possible.
De La Rosa & Co. bankers and Oxnard city staff developed a multi-pronged
financing approach, beginning by identifying utility, redevelopment and other
revenue. Certificates of Participation securitizing gas-tax revenue became an
important component of the overall plan.
California collects 18¢ per gallon for gasoline, diesel and other fuels at the
pump. Each month, cities and counties receive 35% of the statewide gas tax,
which must be used for street construction and maintenance. During a typical
year, Oxnard receives about $3.4 million from the gas tax, barely enough to
patch streets suffering from deferred maintenance.
“Our engineers tell us that if the streets are reconstructed and you maintain
them appropriately,” Oxnard's financial services manager, Michael More, told
the Bond Buyer newspaper, “you'll get more life out of them than if you just do
the annual slurry seals and patching of older streets.”
De La Rosa developed an innovative $27.7-million COP program for Oxnard, the
first long-term gas-tax deal in California with no General Fund pledge. The
firm obtained an “A” underlying credit rating and “AAA” bond insurance, and
secured an overall cost of borrowing of 4.74%. The bonds closed last December.
Banker John Kim said leveraging future gas-tax revenue to repair streets now
makes good economic sense for most cities and agencies. “Every day they wait,
streets fall into greater disrepair and the cost of fixing them rises,” said
Kim, who led the DLR team on the Oxnard project.
De La Rosa quickly followed the Oxnard deal with a $60-million COP in Santa
Ana, and is now assembling two gas-tax pools with the California Statewide
Communities Development Authority. A new CSCDA website highlights the gas-tax
program under “TRIP: Total Road Improvement Programs.”
De La Rosa structured the Oxnard and Santa Ana financing around a potential
legislative roadblock. On Feb. 16, Gov. Arnold Schwarzenegger signed Assembly
Bill 7, which delayed five months of gas tax payments to cities and counties
until Sept. 30. The bill also allows local governments to backfill the delayed
revenue with Prop. 1B funds.
The first gas-tax pool, a $20-million deal for Coachella and Indio, will close
in April. The bonds will be sold uninsured, with a likely “A” rating from
Standard & Poor's. The all-interest cost will likely be around 5.75%.
Possible participants in a second gas-tax pool being organized for summer
include Richmond, La Puente, Long Beach and Sonoma County. The deadline for
participating city councils and boards of supervisors to approve financing and
validation is April 30. The default judgment on validation actions must be
received by June 30, and the bonds will close in August.
A third pool may be organized for the fall. The deadline for participating city
councils and county supervisors to approve financing and validation would be
July 31. Default judgment on validation actions would have to be received by
Sept. 30, and the bonds would close in November.
Values Gap “Cushions” Mortgage Crisis for City Planners
Market values still exceed assessed
values, and this helps redevelopment agencies trying to project future revenue
growth and stability.
The mortgage meltdown has seriously affected property values, particularly in
California. Default rates have accelerated as lenders tightened credit
standards and borrowers could not refinance Adjustable Rate Mortgages with
short fixed periods. Continued defaults could lead to more foreclosures, more
homes on the market, and steeper declines in residential real-estate values.
Meanwhile, new buyers will find it harder to qualify for mortgages.
Many cities are already experiencing substantial declines in property transfer
taxes. Further residential real-estate troubles are likely to curb consumer
spending. However, market values still exceed assessed values, and this helps
redevelopment agencies trying to project future revenue growth and stability.
When California’s real estate market was hottest, home prices increased by
double-digits from year to year. Under state law, though, property assessments
are capped at 2% annual growth, barring a resale of the property. The resulting
gap between excess market value and assessed value offers many redevelopment
agencies a substantial “cushion” from drops in revenue.
Even reselling property at substantially reduced prices may increase assessed
value, and agencies will also benefit from reduced appeals by taxpayers who do
not sell their homes. Protecting tax-increment revenues won’t solve the crisis,
but may soften these latest blows.
On a side note, many analysts are beginning to view commercial-heavy project
areas more favorably. Their traditional preference for residential property was
based on the diversity of taxpayers and owners’ tendency to pay taxes on time
and file fewer appeals. Commercial properties, which are much more closely tied
to rents than residential, are less affected by property value increases. As
such, commercial-heavy districts may be less vulnerable to an accelerating real
estate correction.
Municipal Bond Issues Offer Homeowners Some Protection
The program is designed to refinance
variable-rate mortgages, often with upcoming rate escalations, with fixed-rate
mortgages.
Many state and local governments, facing the worst housing slump since the
Great Depression, are considering or have issued municipal bonds to fund a
mortgage-refinancing program. The program is designed to allow homeowners to
refinance variable-rate mortgages (often with upcoming rate escalations) with
fixed-rate mortgages.
Currently, state and local governments can issue taxable single-family mortgage
revenue bonds secured by the individual mortgages. These bonds do not put
taxpayer money at risk. For example, the Ohio Housing Finance Agency issued
$175 million in bonds this past October. To qualify, a borrower's household
income must not exceed 125% of the median gross income in their county.
The U.S. Congress recently tried to extend tax-exempt financing authority to
state and local governments for this purpose. Treasury Secretary Henry Paulson
also called for legislation that would allow states and local governments to
use tax-exempt bonds to help homeowners refinance mortgages. Although the
details, including raising the volume cap for private activity bonds, must
still be worked out, many are pleased to see Washington involve state and local
governments in the sub-prime crisis.
Finding Opportunities in the Financial Minefield
Prudent investors can purchase
agencies and corporate bonds at spreads not seen in the past five years.
In this volatile environment, the ability to differentiate between wide spread
assets and value is critical. Finding value depends on product knowledge,
judgment, precise analysis and a sound understanding of the risk. De La Rosa's
fixed-income professionals have the expertise and experience to help portfolio
managers and investors identify opportunities to increase the returns on their
portfolios.
Financial experts are still assessing the depth of the current economic crisis.
Moody's anticipates nearly $60 billion in losses on home-equity loans and $278
billion in mortgage losses. The U.S. Conference of Mayors forecasts a
$1.2-trillion drop in property values and a $6.6-billion decline in tax
revenues. Wall Street, once overly optimistic about the availability of cheap
credit, now appears equally pessimistic.
The structured-debt markets remain highly illiquid due to uncertainty in the
sub-prime, residential mortgage and real-estate markets. Adding to the
uncertainty is the questionable financial strength and future ratings of major
monoline guarantors Ambac, FGIC and MBIA. FGIC has been downgraded to BB from
AA. The next area of concern is the potential for defaults in equipment leases,
auto securitizations, commercial real estate and other related asset classes.
The good news is that officials have many tools to ease the debacle. The
Federal Reserve has responded quickly to the lack of available credit, reducing
the discount rate and Fed Funds, changing collateral rules, and even bailing
out major brokerage firms.
Meanwhile, prudent investors are finding exceptional opportunities to purchase
agencies and corporate bonds at yield spreads not seen in the past five years.
New entrants can take advantage of double-digit returns in certain
mortgage-related securities.
The frenzy of lending for the sake of lending is now over. Credit markets are
realigning around sound business principles. Markets are demanding more return
for the risk. All classes of securitized assets are at the widest spreads on
record to both Treasuries and swaps curves. For example, AAA fixed-rate
home-equity spreads are trading at 250 basis points to Treasuries. Wrapped
securities can be purchased at even wider spreads.
The widening in yield spreads for residential mortgage-backed securities is
most pronounced in the home-equity arena. Single “A/A” equity bonds priced
around a 90s handle a year ago are now trading at a multiple of coupon in the
10 to 30 price. Spreads have gone from about 250 to a range from 400 to 2,500,
depending on the collateral performance and expectations for losses.
The Home Team
Spring is bursting forth and
Californians are flocking to basketball and tennis courts, soccer fields and
baseball diamonds. When they aren't competing themselves, many De La Rosa &
Co. personnel are coaching young athletes.
President Ed De La Rosa coaches his son's basketball team, the
Barrington Wildcats. “It's tremendously gratifying to watch the kids have fun
while learning the principles of fair play, sportsmanship and teamwork,” De La
Rosa said.
Meanwhile, Principal Ben Stern coaches his son’s All Star Soccer team,
the Palisades Eclipse.
Senior Vice President John Moynihan is an assistant coach for his
11-year-old daughter's softball team, the Cal State Fullerton Titans. “Our
league went with local college names this year,” Moynihan said. “I've been an
assistant coach in the league for four years, spanning seven seasons, from rec
ball to All Stars.”
Senior V.P. Jonathan Worley's daughters Madison, 14, and Riley, 11, and
son Troy, 9, are fixtures in the Arcadia Girls Softball Association and Little
League. “My favorite aspect of coaching youth sports is seeing the girls and
boys grow up and watching their progression as athletes and thinking that you
helped them along the way.”
In the Bay Area, Principal Ralph Holmes is helping his daughter's
4th-grade basketball team get their half-court press into gear, and Senior V.P. Eric
Scriven is an assistant coach for his 9-year-old son's basketball team,
the Mavericks. Associate Mike Meyer teaches tennis to kids from East
Palo Alto and occasionally coaches promising young players, including an
11-year-old boy who is ranked in California.
Dueling Eminent Domain Measures on June 3 Ballot
From the League of California Cities
NO on Prop. 98
This anti-rent control measure would also eviscerate local land use planning,
gut environmental protections and undermine public water projects needed to
ensure the state an adequate supply of clean drinking water. The League of
California Cities warns that this deeply flawed measure, also known as the
“Hidden Agendas Scheme,” is being funded by wealthy apartment owners and mobile
home park owners.
YES on Prop. 99
If passed by voters, the Homeowners Protection Act would provide solid
protections for homeowners by prohibiting governments from taking an
owner-occupied home to transfer to a private party. The measure is a direct
response to the U.S. Supreme Court's infamous Kelo v. City of New London
decision of 2005. The broad coalition supporting Prop.99 includes seniors,
homeowners, business, labor, environmentalists, affordable housing advocates,
public safety leaders and local government.
For more information on both initiatives and the campaign, visit
http://eminentdomainreform.com
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