Recession, Credit Crisis Stall Louisiana’s Hurricane Recovery Bonds

February 2, 2009

The U.S. recession and credit crisis have stalled a financing program created to help Louisiana recover from 2005’s devastating hurricanes, the southern state’s secretary for economic development told Reuters.

To urge companies in Louisiana, Alabama and Mississippi to rebuild after Hurricanes Katrina and Rita, the U.S. government allowed those states to issue tax-exempt private activity and mortgage bonds in a program that expires in 2011.

In essence, states grant the authority to issue “Gulf Opportunity Zone bonds” to companies willing to develop badly hit areas. Because the bonds are tax-exempt, they can offer lower interest rates and keep borrowing costs down.

“What we’ve seen is that we have a lot of companies with projects that are basically ready to go but are unable to issue their bonds at anything close to a competitive rate,” said Secretary Stephen Mouret.

Once Louisiana approves a company’s application for financing, the company must issue debt in 240 days. If it does not, it can reapply, but the application is pushed to the back of a line, Mouret said. During the 240-day round ending this month, most companies did not sell the debt.

“In this particular case … companies allowed their allocations to expire and effectively restarted the clock because there was no one who was waiting in line,” he said.

At the end of 2008, the municipal bond market was virtually frozen with lower-rated deals scratched and highly rated issues having to pay steep yields. But Mouret said the credit crisis is hurting his state beyond the muni market.

Louisiana set aside $1 billion in bonding authority for New Orleans. More than three years since the Gulf Opportunity law was signed, the city has not issued any of the bonds, he said.

“A lot of the New Orleans projects tend to be real estate-oriented projects and obviously that market in general has gotten more difficult,” Mouret said. He added that the bonds barely cover rising insurance rates and construction costs.

The stimulus plan recently passed by the U.S. House of Representatives has similar recovery bonds for areas in the country hurt badly by the recession.

“The idea of the GO Zone bonds was terrific,” Mouret said. “But, again, it depends on there being a basic functioning market.”

(Reporting by Lisa Lambert and Tom Doggett; Editing by Dan Grebler)

Topics USA Catastrophe Natural Disasters Louisiana Hurricane

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