Bond market ripe for action

The federal interest rate can make or break a project. From new construction to remodeling work and refinancing an old loan, three of Springfield’s largest businesses are capitalizing on historically low federal rates for state and local bonds.

With a combined $272 million in bonds issued within the last two months, CoxHealth, Springfield Public Schools and the city of Springfield plan to strike while the iron is hot.

The interest rate on state and local bonds for the week ending May 24 is 3.7 percent, according to the U.S. Federal Reserve. That’s down just 0.22 percent from the same time in 2012, but almost a full percentage point from prerecession interest rates of 4.53 percent in May 2008.

David Mitchell, Missouri State University associate professor of economics and director of the Missouri Bureau of Economic Research, said bonds are thriving in the current market due to interest rates, which dictate different terms to maturity, depending on the market’s expectations of future levels of inflation. Mitchell said businesses such as CoxHealth – which issued $200 million in bonds for construction of its new patient tower – will continue to see benefits.

“CoxHealth has a moneymaker on their hands for the next 40, 50, 60 years,” he said. “It was a smart move on their part.”

Scheduled for completion in 18 to 24 months, the 310,000-square-foot addition to Cox South would house a women’s and children’s hospital and a neuroscience center, as well as room for future expansion.

CoxHealth Chief Financial Officer Jake McWay said the health care system issued the bonds at 4.5 percent for 35 years, adding the decision to move forward was driven by a combination of operational needs and the favorable financing environment.

“Both the short- and long-term borrowing rates that exist today are among the lowest experienced in decades,” McWay said via email. “One only needs to look at current mortgage rates to understand the comparison. It is unprecedented.”

McWay said the health care provider conducted an analysis of market demographics and growth potential before proceeding with the bonds on April 3.

At the time the bonds were issued, CoxHealth CEO Steve Edwards said interest rates were the lowest he’d seen, noting, “If interest rates went up a point and a half, it would cost us $43 million more.”

Adding to the current appeal of bonds, Fitch Ratings and Standard & Poor’s recently reaffirmed Missouri’s AAA credit rating, the highest score given by the agencies. The ratings apply to general obligation bonds issued by the state. Gov. Jay Nixon said the top rating will “save taxpayers millions in interest.”

Mitchell said the rating reaffirms an already strong market in Missouri.

“This rating essentially ensures state agencies will be able to borrow at the lowest rates,” he said. “It’s just like a consumer credit card. Good credit means lenders know you are able to pay back any borrowed money and you get a low interest rate.”

The city of Springfield plans to take advantage of future interest savings through refinancing a construction loan on the Ozark Empire Fairgrounds Center Hall. Finance Director Mary Mannix Decker said dips in interest rates were a key factor in the city’s decision to issue $497,000 in special obligation bonds. Decker said the city wouldn’t typically refinance anything less than $4 million, but the proposal came at the request of the Agricultural and Mechanical Society of Springfield, which manages the property.

“We are going from a current rate of 6 percent down to 3.75 percent interest,” Decker said. “We want the fairground to be strong because they are a critical part of the community and a significant sales tax generator, so this is what the city could do to help.”

The proposal will shrink the society’s current $10,000 monthly lease payments to $6,500 through October 2015; then $7,500 through the same month in 2020; increasing to $8,500 through October 2025; before rising to $9,500 through October 2030.

In April, Springfield voters approved Proposition Classrooms for Kids, allowing Springfield Public Schools to issue $71.65 million in general obligation bonds to construct new buildings and make improvements to existing schools and equipment. SPS Chief Financial Officer Steve Chodes did not return calls for comment.

According to Springfield Business Journal archives, facility improvements to be provided by the bonds include $19.3 million in renovations to Kickapoo High School; $4 million for Glendale High School cafeteria and library upgrades; $17.8 million for a new elementary in southwest Springfield; $13.5 million to add 45,000 square feet to Fremont Elementary School; $1.1 million for additional elementary classrooms at Hickory Hills elementary and middle schools; and $16 million to upgrade technology.

“Long term, the U.S. economy is bullish, but short term not so much,” Mitchell said. “As soon as the Federal Reserve bumps up the interest rate, bonds will dwindle down. Now is the time.”