World Trade Center is Biggest Unrated Municipal Bond Deal Ever11-17-2014 |
One World Trade Center is now open for business, but developers are still dealing with funding issues to construct its neighbor, 1,170-foot Three World Trade Center. Developer Larry Silverstein is turning to municipal bonds as an investment solution due to the recent rally in the muni-bond market.
Last month, Larry sold $1.6 billion worth of bonds to finance the construction. The sale is the biggest unrated municipal bond deal ever and the developer is slated to pay less than 5.4% for $1.36 billion of the debt, and about 7.25% for $231 million in debt. Government agencies are also assisting with a subsidy agreement to cover the first $390 million of shortfalls.  The bonds will be backed by tenant leases and rents, and will also be secured by a mortgage.
The building, set to open by 2018, will be the fourth building to open in the site since the 9/11 terrorist attacks. Some say investors are taking on big risks since the developer has only signed on one tenant so far and the bond documents state that there is a possibility that the tower may not be completed and cite other concerns as well.
So why did Silverstein turn to muni bonds? After the financial crisis, new sales of muni bonds declined which dropped the overall supply, in turn helping boost muni bond prices and the total return on the securities. As a result, munis are out-performing other fixed-income assets, with average total returns at just over 8 percent, according to Barclays indices on November 13th. In comparison, U.S. Treasuries are seeing a total return of 4.16 percent while investment grade corporate debt is seeing a total return of 7.4 percent, according to Bloomberg Corporate Bond Indexes on the same date.
We won’t know for some time if these investors will see a positive return on investing in the biggest, unrated municipal bond deal ever, but I hope we’ll see happy investors and more developers continuing to turn to the bond market for financing.