The sky isn't falling
Bloomberg
Dirt-Bond Sales Near ’07 Peak Belie IRS Tax Ruling: Muni Credit
Demand for $6 billion of bonds sold to finance Florida housing developments shows no signs of waning even after the Internal Revenue Service said debt issued for a project of billionaire H. Gary Morse isn’t tax-exempt.
A Florida land-backed bond sale last week by Verona Walk Community Development District brought issuance of such debt this year to $323 million, close to the highest since 2007, data compiled by Bloomberg show. In May, the IRS alerted Morse that bonds sold to finance a district he created weren’t tax-free, a decision with potential implications for hundreds of similar entities.
Land-backed debt, dubbed dirt bonds, is the riskiest municipal segment, accounting for almost half of default filings where investors didn’t get paid, according to Concord, Massachusetts-based Municipal Market Advisors. Still, buyers are drawn by the extra yield. Wells Capital Management and Nuveen Asset Management plan to keep their bonds from Morse’s project while continuing to buy debt of certain districts.
“There’s a yield premium in the market for this type of debt that makes them competitive,” said John Miller at Nuveen, who oversees $95 billion of local debt in Chicago. “That tends to limit the amount by which the bonds would fall.”
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