Municipal Bond Forum
Short-term bond auctions and munis
Q
What effect will the lack of participation in the short-term bond auction in Colorado have on the Colorado municipalities, which will have to now pay much more in interest? If they cannot pay, what will happen?
A
James A. Klotz responds:
There is no standard answer that holds for all issuers, either in Colorado or elsewhere. Each issuer that utilized this interest setting format would have to be analyzed independently in order to assess its ability to fund obligations under the circumstances you cite.
As you know, bond ratings for different issuers differ partly based on financial performance. Issuers with stronger liquid fund balances would be more likely to withstand interest rate “shock” from auction failures. At present, if Colorado issuers are having difficulty meeting payment obligations, we have not heard of any. Each credit would have to be analyzed on its own merits to determine whether its exposure to an interest rate spike is problematic.
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