Oyster Bay’s downgrade to junk status increased its cost of borrowing as investors last week demanded higher returns on $94.8 million in debt.
“They are paying a severe penalty which is a product of their own mismanagement,” said Fred Yosca, a bond trader at BNY Mellon in Manhattan. Yosca said the economy and the town’s tax base should have made it solidly investment grade.
The town’s first debt issuance since Standard & Poor’s April downgrade was limited to a category of investors who meet asset requirements to invest in more speculative securities. In 2011, Oyster Bay had Standard & Poor’s top AAA rating, but since then has been repeatedly downgraded.
“We are aware that when your [Oyster Bay’s] rating is where it is, you’re going to pay a little bit more interest,” Oyster Bay finance director Robert Darienzo said.
Last week’s borrowing included funds for cash flow that had been postponed after the downgrade to junk status and a renewal of outstanding short-term debt for capital expenses that was due. The cash flow portion of the offering was reduced by $13 million to $17 million due to the town receiving settlement funds from Nassau County for utility property taxes. The town plans to reduce borrowing generally to reduce costs.
“We will minimize our debt issuances until such time as we repair and restore our rating,” Darienzo said, adding that the town was pleased that there had been plenty of investor interest in the notes.
A Newsday analysis of the deal, which was sold as short-term notes with maturities ranging from eight to 23 months, shows that the town is paying about $3.4 million more than it would have had it been able to borrow at Thomson Reuters’ benchmark rates for top rated municipalities.
“It’s a sign that investors have little certainty about what will happen with the town’s budget or their finances over the next two years,” said Matt Fabian, a partner at Concord, Massachusetts-based Municipal Markets Analytics research firm. The market signaled that “something is broken in the town and needs to be repaired,” Fabian said.
Yosca said it was difficult to find a comparison with Oyster Bay.
“The only other large municipal credits that are in the same dire straits that they are, are ones with very severe economic issues such as Detroit and Puerto Rico,” Yosca said.