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Stepping Out of the Market Could Mean Missed Opportunities

Tax-exempt bond financing provides government agencies with the advantage of incurring debt at substantially lower (by about one-third) interest rates than non-government entities. Government agencies can also borrow 100% of the amount needed, without the need for an "equity" contribution of any kind. In the current economic environment of rising interest rates, inflation and supply chain disruptions, borrowing money and locking in project construction funds can be a sound economic strategy.

Our team at Weist Law is made up of experts in public finance, including debt issuance and debt restructuring. Weist Law has completed a wide array of debt issuance techniques for our trusted clients, generating millions in savings.

With recent market headwinds, many public issuers have decided not to refinance or issue new debt. According to the Wall Street Journal, state and local government refinancing activity fell by nearly half in the first quarter of 2022, to $21 billion. Governments are relying less on borrowing due to their fears of the rising interest costs.

These fears are not unfounded given the unprecedented worldwide economic activities, some of which include:

1. War in Ukraine 2. Inflation – headline CPI up 8.3% y/y. 3. Fed tightening – target funds rate at 0.75%-1.0% and a least two more 50-basis-point increases projected. 4. Interest rates – treasury rates have moderated as investors move to treasuries to protect capital while muni rates move up to 4% tax-free and mortgage rates hit 5% for 30-yr. 5. Spike in oil prices – up 70% in last 12 months. 6. Slowdown in China – Q1 GDP growth 4.8%. 7. Supply chain disruptions. 8. Excess inventories – grew in response to supply chain issue but then proved to be too large as Q1 sales slowed. 9. Disappointing performance by major retailers. 10. Big tech reversing as Covid-19 recovery continues. Yale economist Robert Shiller says, "fear can lead to the actuality" of recession if it makes local governments, consumers, investors, and companies more cautious. It is crucial to remember, that municipal bonds will continue to provide tax-efficient value for investors in times of uncertainty. New bonds issued after rate rises generate more interest income for investors making them lucrative investments in times of market uncertainty. Municipal bonds cover a wide range of maturities and quality, giving investors room to maneuver as conditions change.

Typically in an economy threatened by a recession, such conditions signal downgrades in credit ratings or even defaults. However, in today's environment, municipal credit has been bolstered by the recent federal fiscal stimulus provided to both the public agencies and local taxpayers. State and local income tax revenues are at a record high in the past 20 years, which means credit conditions are actually better than they have been in years.

As a public agency, stepping out of the market completely means missed opportunities. Just waiting for inflation to settle down can lead to substantial increases in project costs and missed opportunities for your agency. Idle cash in reserve funds will only be eroded by inflation. It is an important time for your public agency to be strategic about its future operations and projects in order to navigate safely through inflationary environments.

The team at Weist Law is offering one on one consultations with agencies to assess their current long-term debt obligations and potential savings opportunities, select the time that works best for you and schedule a meeting directly through our website by clicking here.


The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact a designated Weist Law representative. This material may be considered advertising under certain rules of professional conduct.

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