A volatile bond market has forced the city and local Cape Girardeau banks to rescind an agreement they reached in February to finance the city's Convention and Visitor Bureau recreation project.
All seven local banks had agreed to finance the project which will include construction of a softball and soccer complex; new, park land; and a multipurpose recreation building through the purchase of $3.73 million in "certificates of participation" at an average annual interest rate of 5.25 percent.
City officials had praised the arrangement as "fairly extraordinary" because it forced banks to achieve lower rates of return on their investment by buying bonds directly from the city.
But Assistant City Manager Al Stoverink said Thursday that shortly after the agreement was struck, bond rates dipped even lower.
Now, the city will market the bonds directly through the Public Facilities Authority at an interest rate of 4.94 percent.
"The rates we're looking at now are significantly lower than they've been for many, many years," Stoverink said. "They're much lower than they were even six months ago.
"When we did the financing plan for this project this fall, we projected average coupon rates of 5.5 percent, so we're still a full half of a percentage point below that."
The financing process is complicated and technical and made more confusing by the bond market's recent volatility.
To fund the project the city will issue certificates of participation, which essentially are little different than municipal bonds.
By using the Public Facilities Authority, a not-for-profit corporation and arm of municipal government, the city is able to finance public projects by issuing debt at tax-exempt rates.
But there were a number of advantages to financing the CVB project directly with the local banks, including lower transaction costs.
"The deal that had been negotiated with the banks was a very good deal for the city at the time," Stoverink said. "The reason we shifted gears to go the market was that right after we had reached the agreement interest rates on the bond market had dropped significantly in response to (President) Clinton's unveiling of his economic plan to Congress.
"The day after his speech, the market took a sharp drop and interest rates came down significantly."
Not unlike a private property owner who seeks to remortgage his home when interest rates drop, the city sought to take advantage of the new rates and refinance its debt.
But Stoverink said the city's debt service exceeds the threshold allowed for a bond issue to be "bank qualified" a term that refers to local banks' ability to take full benefit of the tax-exempt interest income.
"The entity issuing those bonds has to certify that it has no intention of issuing more than $10 million in bonds in that particular calendar year," Stoverink said. "But when the market took that drop, we were in a position to finance other old debt, and the amount of that refinancing would be more than $10 million."
In other words, if the city issues the CVB bond directly on the market, it also will be able to refinance its old debt.
"The market is fluctuating," Stoverink said. "We're hopeful there will be another dip in those rates later this summer that will allow to refinance more of our debt."
The city council met Thursday to authorize the issuance of the CVB project bonds. At Monday's meeting, the council will consider refinancing the Show Me Center bonds, depending on interest rates then.
Stoverink said that when the city decided to abandon the financing agreement with the local banks, he was concerned that some would think the city was "reneging on a deal." But the assistant city manager said the city was left with few alternatives.
"Once the market dipped as it did, we could no longer get an opinion from our bond council that those bonds would be bank qualified," Stoverink said. "I think everyone understood that, and that it was really beyond our control.
"The other aspect of it, I think, is that the banks, to their credit, took the attitude that the city was a customer; in many respects, like any other customer looking at refinancing their mortgage," he said.
Stoverink said that although the financing agreement with the local banks fell through it was by no means in vain.
"The whole process certainly opened up new lines of communication, which is going to help in the future," he said.
The $4 million CVB project includes construction of softball and soccer fields at Shawnee Park; acquisition of a 90-acre tract of land at Mount Auburn and Kingshighway for development as a "general-use community park"; construction of a 32,000-square-foot, multiuse building on the site; and completion of a fitness trail through Arena Park and the new park site.
The financing is derived from excess tourism funds, which are financed by a quarter-cent tax on motel and restaurant receipts.
The design process for the proposal is expected to take three to six months once a contract with an architect is granted. The total project is expected to be finished by 1995.
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