Comments on: Poway: It’s not too late to unwind

By: Marked2Market

Marked2Market — Tue, 11 Sep 2012 00:09:13 +0000

I agree with the basic idea here, which I take to be that this is lazy public financing. Zero coupon debt combined with a political desire to avoid current period taxation is a dangerous combination. However, I think that you are being somewhat misleading when you compare the zero coupon bond yields in the Poway structure to the spot treasury.

A 30 year treasury principal strip has a yield of about 3%, not 2.61% at the moment. Moreover, it sells for about $40.

By: crocodilechuck

crocodilechuck — Mon, 10 Sep 2012 06:39:42 +0000

Felix,

Good to see Reuters stump up for a haberdashery budget. Nice shirt.

By: crocodilechuck

crocodilechuck — Mon, 10 Sep 2012 06:38:23 +0000

Felix

Nice shirt.

By: Luke-John

Luke-John — Mon, 10 Sep 2012 05:25:55 +0000

What still puzzles me is how, in a time when interest on invested capital ranges from 0% to 0.75% – even 30-year fixed-rate mortgages are at 3.5%, Poway got suckered into paying for a loan that costs them about10% compounded over 20+ years.

Like the old “Chargers ticket guarantee” signed by the SD City Council years ago, this could be described as “felony stupid” if you ask me.

By: Luke-John

Luke-John — Mon, 10 Sep 2012 05:03:40 +0000

Like the old “Chargers ticket guarantee” signed by the SD City Council years ago, this could be described as “felony stupid” if you ask me.

By: Luke-John

Luke-John — Mon, 10 Sep 2012 05:03:15 +0000

Like the old “Chargers ticket guarantee” signed by the SD City Council years ago, this could be described as “felony stupid” if you ask me.

By: Orange14

Orange14 — Sat, 08 Sep 2012 22:00:04 +0000

LOL! My late father’s architectural firm designed a number of schools in the Poway school district but this was in the good old days when they taxed residents for school building. It paid part of my way through college. It really is foolish of them borrowing at such high interest rates and we may see them go the same way as the railroads did when they issued 100 year bonds! Of course the fine citizens of Poway always have the option of moving before the debt payment comes due but I wonder what will happen to real estate prices in the district when this gets priced in. Could be some real surprises in store particularly in 20 or so years from now.

By: guanix

guanix — Sat, 08 Sep 2012 19:14:21 +0000

2,300 cents on the dollar sounds like a lot, it works out to a yield to maturity of 8.37%. Presumably it’s only worth paying off if Poway can borrow from someone else at a lower rate.

By: DerDoktor

DerDoktor — Sat, 08 Sep 2012 19:03:47 +0000

That “$13,986,037.80, which matures in 2051, when bondholders will receive a total of $321,740,000″ indicates a nominal compound annual return of 8.2%.

I wouldn’t buy that at par given the credit risk and inflation risk.

If you think it’s so outrageous, go ahead and stuff some of those bonds in your retirement account.

That said, yes, these municipalities do all kinds of bad deals so that they can avoid confronting current cash needs, kicking the can down the road for the next generation to deal with.

By: MrRFox

MrRFox — Sat, 08 Sep 2012 09:46:40 +0000

Look, SunTrust appears to have language in their deal that contemplates early redemption. The Poway deal expressly forbids it – quite logical in a deal involving ‘zeros’/deferred-interest methodology. How the hell you could establish the strike-price in the written agreement?

I say – ‘Chill, Dude.’ Better than 50:50 that before too long Poway will be able buy-in on the open market a big chunk of these notes at less than ‘face’. That’s better for Poway than any ‘strike’ that could plausibly have been written into the funding contract.

By: Stevensaysyes

Stevensaysyes — Fri, 07 Sep 2012 22:21:35 +0000

As someone so demonstrably financially literate, why did you decide in this post to reinforce the most naive interpretations of the time value of money? There are many ways to value a bond deal, the total amount of interest paid (ignoring the time to maturity) is not one of them. I quickly calculated the interest rate of the $13,986,037.80 tranche maturing in 2051 to be about 6.6%. Is this a bad deal? I have no idea, because you made zero effort to evaluate this question in a financially sophisticated way. Newer readers are probably worried about your retirement savings, given the Rand study you referenced yesterday.

By: Stevensaysyes

Stevensaysyes — Fri, 07 Sep 2012 22:18:19 +0000