Austin Partner Adam Harden, a member of Locke Lord's Public Finance Practice Group, was quoted by The Bond Buyer on potential arbitrage concerns for tax-exempt bond issuers in an inflationary market and challenges facing municipal advisors and bond counsel.
“Declining interest rates make it generally easier to manage arbitrage,” he said, noting an issuer may not have the opportunity to earn arbitrage if interest rates continue declining during the construction period.
“Where you may start to see some issues is in an inflationary market in which bonds are issued with that same 3% yield for new construction, gradually, or maybe even suddenly, the interest rates skyrocket, and there exist boundless opportunities to out-earn the yield,” he added.
Harden also said that circumstances such as an issuer experiencing staff turnover can lead to a lack of clarity about post-issuance compliance procedures.
“That is precisely where post-issuance teams and regular check-in calls are worth their weight in gold, and it would not surprise me if that is where we are heading based on what we are seeing with inflation,” he said. “If inflation is not transitory and rates increase, either gradually or dramatically, there may be accidents ahead.”
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