Refinancing not feasible for most of Fort Smith’s bonds

Dennis Hunt and his employer would love nothing more than to refinance the roughly $280 million in outstanding bonds held by the city of Fort Smith.

So far in 2010, refinancing debt has been about 90% of the business for the Northwest Arkansas office of Little Rock-based Stephens Inc., said Hunt, a senior vice president with Stephens.

“We want to convince the client to do it (refinance debt). That’s how we make money associated with doing these,” Hunt said. “We watch the city’s debt very closely to determine when to pull the trigger.”

No triggers will be pulled in the near term, however, with the possible exception of $3.44 million remaining in an original $5.29 million bond issue for improvements at the Fort Smith Regional Airport. The preliminary analysis is that refinancing will result in up to $400,000 savings to the airport for the bonds issued in 1999. Hunt said if the airport commission and Fort Smith board of directors decide to pursue refinancing, a review of the airport’s finances and other evaluations will be required. He said it takes about 45 days to “go to the market” with a refinance once the decision is made.

A remaining $815,000 on a 1998 series bond issue for parking facilities is eligible for refinance, but city staff and Stephens’ advisors aren’t sure the time, effort and size of issue that would go to the market is worth the estimated $39,000 in savings.

A decision on airport bond refinancing is probable.

“It looks like it makes economic sense to refinance that, and the airport commission will review the details of that. If they decide to refinance the bonds, the board will have to approve the ordinance,” said Deputy Fort Smith City Administrator Ray Gosack.

Refinancing bonds requires evaluation of more factors than in refinancing a mortgage or other forms of debt, Hunt explained.

There are three key areas to consider, according to Hunt: maturity date, rate at which bonds are being paid off and the redemption date.

“The closer the maturity, the more than likely the refinancing doesn’t make any sense,” Hunt explained.

Two sales tax-supported bonds set to mature Sept. 1, 2014, will likely be paid off two years to 18 months prior to the maturity date — which means a little more than $52 million in bonds don’t make economic sense to refinance.

Bonds with maturity dates beyond 2020 have yet to meet their redemption date. A redemption date guarantees the bondholder a set interest rate and certain income for a predetermined period. That period is typically 10 years for most municipal debt secured with sales tax or fees, Hunt said. Therefore, because the bondholder is guaranteed a certain income, refinancing bonds within the period does not lower a city’s bond payment.

“No, you really can’t look at it (bond refinancing) like refinancing that (home mortgage),” Hunt said.

There is a sweet spot, so to speak, between the proximity of maturity and the redemption date terms. If interest rates are low when the redemption date occurs and the bond maturity is several years away, then refinancing is often an option.

Unfortunately, there few such sweet spots for the city of Fort Smith, Hunt explained. Of the city’s 13 bond issues, five are “not economically feasible due to the redemption date” and six have maturity dates less than four years out, Stephens noted in an early 2010 analysis of Fort Smith’s debt.

Fortunately, Hunt said, the city is making good progress on paying the bonds, with about $95 million likely to be paid off within the next three years. Hunt also said the city is not overburdened with bond payments. For example, he noted that the Fayetteville School District has bond debt of more than $150 million.

Hunt’s assessment mirrors that issued in 2008 by ratings agency Standard & Poor’s. In the summer 2008 report, S&P gave the city a AA rating on a $26.405 million bond issue. The rating was an upgrade from AA-.

“It’s a very fair assumption to say the Fort Smith debt is within reason if they are giving it such a good rating,” Hunt said, adding that “nationally I would say (Fort Smith’s debt) is, on a per capita basis, much lower than most communities.”