Dallas/Fort Worth International Airport U. S. Bond Market Squeezed by Credit Crisis



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tarix29.01.2018
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Dallas/Fort Worth International Airport

  • U.S. Bond Market Squeezed by Credit Crisis


What has caused the Credit Crisis?

  • Poor lending standards and underwriting practices of banks

  • Increased use of leverage in financial instruments in recent years

  • Consumers willing to take on more debt due to favorable economic conditions over the past five years

  • Lower credit requirements by banks to attract new business

  • Extending credit to consumers who normally did not qualify for loans (sub-prime borrower)

  • Adjustable rate mortgage financing structure has caused foreclosures

  • More than 100 sub-prime mortgage lenders have failed or filed for bankruptcy i.e. New Century Financial Corporation



How the U.S. Credit Crunch Went Global

  • The huge bundling of sub-prime mortgages packaged and sold to financial companies across the world

  • Bad loads are having a major impact on foreign banks and markets

  • French bank BNP Paribus froze three of its funds worth approximately $2.75 billion

  • NIBC, midsize Dutch Bank, reported an estimated $189 million loss

  • European banks have begun to hoard their cash and have increased the interest rates they charge to lend each other causing liquidity concerns

  • European Central Bank loaned the eurozone region’s banks a record $130 billion to stimulate liquidity

  • Similar concerns prompted other world central banks to make the same move, such as Japan, Australia, Canadian and US



What are the results of the credit crisis?

  • The major result of the credit crisis has been the lack of liquidity available in the money markets

  • Banks are reluctant to lend to one another or extend credit lines to traditional customers

    • Brokers dealers
    • Money managers
    • Hedge fund managers
    • Others
  • The reluctant is due to uncertainty about how much credit exposure they may have with problem loans

  • Banks are hoarding money to cover losses they incur in the coming months



How does the credit crisis affect the tax-exempt issuer?

  • Stringent credit standards and reluctance of banks to lend have caused the cost of borrowing to increase

  • The liquidity shortage may make it more costly for investors to finance their bond purchases

  • LIBOR (London Interbank Offered Rate) is the rate at which banks in Europe loan to each other for 1 week to 12 months

  • LIBOR is used to determine the price of variable rate government and corporate loans

  • Municipal issuers may have to offer higher yields to attract investors



How does the credit crisis affect the tax-exempt issuer?

  • Stronger investor demand has driven long rates lower while yields on auction rate securities (ARS) continue to trend higher for credit/liquidity reasons



Municipal Bond Deals Squeezed by Credit Crisis

  • The widening credit crunch is making it harder for U.S. municipalities to fund vital projects from the $2.5 trillion market for municipal bonds

  • The credit crunch has forced issuers to choose between delaying the project or pay higher interest rates

  • Paying higher interest rates ultimately effects the tax payer and its affects rates, fees and charges that airports pay

  • Lower rated entities must pay more in borrowing costs

  • Many municipalities faced with paying higher interest rates have delayed their financing

    • Chicago – $960 million
    • Miami International Airport - $540 million
    • District of Columbia - $350 million


Municipal Bond Insurance Crisis

  • The municipal bond market has been squeezed by steep sub-prime related losses among the bond insurers

  • Entities with poor credit ratings often rely on insurers to back their bonds enabling them to pay lower interest rates

  • Insurers are now facing massive write-downs due to their exposure to the mortgage industry

  • Some bond insurers are running out of money and a few are endanger of being downgraded by the rating agencies

  • Ambac’s “AAA” rating was recently downgraded to “AA” by Fitch

  • XL Capital Assurance was downgraded 1/24/08 from “AAA” to “A” by Fitch



U.S. Airports with Variable Rate Exposure



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