All told, there are roughly $600 billion of these so-called conduit bonds, accounting for about 15% of the municipal bond universe.
There are few checks and balances, largely because the agencies aren’t responsible for the debt if a project fails. The securities are often unrated, and when interest rates were at rock-bottom levels, some of the highest yields in the industry made it easy to attract money managers in droves.
Now, as soaring borrowing costs close the door to low-cost refinancings, many more projects may be pushed to the brink.
“We’ve set ourselves up for a decent pipeline for defaults,” said Matt Fabian, a partner at Municipal Market Analytics.
His firm estimates that conduits already account for roughly three-quarters of the $15.5 billion of municipal bonds currently in default, excluding those from Puerto Rico. Among them are securities sold through the Arizona IDA, which has seen eight of its bond issues lapse into default since 2020, the fourth-highest among such conduits, according to MMA.
By the time Miller turned to the agency, it had already rubber-stamped dozens of bond-sales applications. In fact, from the time the agency was established in 2016 through June of last year, borrowers had raised over $8 billion selling conduit bonds using the agency’s name to finance 124 projects, according to the state audit. Not once was an application rejected.
Dirk Swift, the executive director of the Arizona IDA, said in an email that the agency leaves it up to underwriters and investors to do the vetting. He said the agency “does not substitute its judgment for the expertise of financial professionals” or “the investing marketplace.”
In August 2020, the agency sold $250 million of bonds for the Legacy project, with investors receiving a top tax-exempt yield of 7.84%, followed by another $33 million sale in June 2021.
The more than 1,000-page offering prospectus characterized Miller as a successful businessman with wide-ranging connections to the sports industry, citing his associations with the United States Football League’s Arizona Outlaws and the Phoenix Giants, which last played in the ’80s.
‘We Never Signed’
The prospectus also said that Miller’s management company had binding “pre-contracts” with 25 organizations planning to use the facility, estimating they would bring in $23 million annually. It said another 26 organizations—including Manchester United—had entered into similar “letters of intent” that promised $19 million more.