Everyone’s concerned about a recession, but the Columbus region is incredibly economically resilient. “Inflation is pulling back and while interest rates remain high, we believe Central Ohio will continue to grow, and skilled leadership within our region will continue to navigate these challenges successfully,” said Steve Brooks, CFFA Vice Chair. “While it’s true that it’s ‘harder to make money at 7 percent,’ as we’ve heard some developers say, they’ve done it before. And we’re seeing the results: cranes all over the city. Central Ohio has a terrific job and population growth engine. Even if it mutes a bit in 2023, we will persevere.”
We all want to know what to expect in 2023. So we asked Michael DiPerna of DiPerna Advisors, CFFA’s financial advisory firm, to weigh in. When Michael shares his thoughts, we listen.
What do you think will happen to interest rates over the next six months to a year?
Michael DiPerna: It’s impossible to predict future interest rates, but based on U.S. Treasury trends over the last couple of months, many believe interest rates will decline and stabilize in the first half of 2023. A couple of major factors to point out: First, the Federal Reserve is expected to increase rates over the first two quarters of 2023, but the increase should be limited to 25 basis points versus the past 50 basis points. These anticipated increases are already baked into the current rates. And second, the inflow of deposits into national investment bond funds is greater than the outflow over the last couple of months, which translates into a higher demand for taxable and tax-exempt bonds, thus hopefully lowering rates.
Overall, we believe, many companies and developers have adjusted to the “psychology” of higher rates. As rates continue to stabilize over the next year or two, the Finance Authority’s Central Ohio Bond Fund will be an active and attractive source of funds for both business and infrastructure expansions. We have a positive outlook.
Are you aware of any federal or state programs that complement Port Authority financing?
There are several Federal and State programs that the Finance Authority has partnered with in the past when financing business and infrastructure projects. At the federal level the Finance Authority has extensive experience working with New Market Tax Credits and Historic Preservation Tax Credits, which provide up-front equity contributions to projects. The key to successfully coupling these sources with Finance Authority sources is understanding the unique security and credit conditions of the programs. Our team’s experience allows us to work through these complicated challenges and find positive solutions.
At the state level, the Finance Authority also has extensive knowledge of how to couple offerings and sources such as the Ohio Enterprise Bond Fund, which has an AA+ rating from S&P Global, with the Central Ohio Bond Fund, capital lease structures and PACE financing programs. Again, the key to success is understanding the unique closing conditions that these programs must meet and how to most efficiently dovetail the documents together. This experience allows the Finance Authority to assemble financing sources that range from $5 million to over $30 million.
What are some key indicators that your firm will be watching in 2023?
Of course, the primary indicator will be the movement of the Federal Reserve. The Fed is expected to continue to raise rates through its June 2023 meeting, with a terminal rate ranging around from 5.0% to 5.25%. In the near future the yield curve should normalize with short term rates falling and long-term rates stabilizing. Rate stability in the market, with a normal yield curve, will allow borrowers to become more confident about committing to long term projects.
If you were a community, what proactive or creative steps would you take as it relates to community and or economic development projects?
We believe communities should create shovel-ready properties that can accommodate future business expansions. When a business is ready to expand, they want to expand now, not wait 12 months down the road, while communities assemble land and provide infrastructure. Communities need to inventory available land, determine the needs and the cost of infrastructure, and seek financing sources to install necessary infrastructure. This means communities must be willing to take some risk, when it comes to financing this process. The Finance Authority’s Central Ohio Bond Fund, which is rated A- by S&P Global, can be used to issue bonds on behalf of the communities. Communities should also become familiar with Finance Authority financing programs and lending criteria in advance of needing these funding sources. Stay ahead of the game and know who to call.
You work for a variety of clients across Ohio, including port authorities, state agencies, and developers. Is there anything unique or interesting happening in other areas of Ohio?
The various regions across Ohio have unique issues and unique solutions. Several of the financing authorities have established local PACE direct loan energy programs to provide energy efficiency loans ranging from $200,000 to $1 million. One northwestern Ohio county has established a $5 million investment program through its CIC to provide equity investments and second mortgage loans for strategic real estate and business projects. Others have begun to allocate some of the savings generated in the capital lease structures to fund supporting infrastructure projects.
The year ended with some lenders tightening their loan-to-value requirement. What are some ways the Finance Authority can help address any resulting financing gaps?
Finance Authority funding programs including PACE financing, monetizing TIF and NCA revenues, and implementing the capital lease and direct loan programs will all have to adapt to accommodate future projects affected by the current tightening of bank credit standards.
In some cases the Finance Authority should consider interest-only structures for the first five to seven years to accommodate meeting the private lenders’ debt service coverage ratios that become more difficult to meet as rates rise. Other accommodating techniques might include selling bonds with an interest rate reset every five or 10 years.
In addition, we’re attempting to structure bonds with early call provisions that will accommodate refinancings in the future at lower rates. These are all subject to the willingness of bond investors to accept these structures. Finally, all of the investment-rated Port/Finance Authority Bond Funds are working to achieve a rating upgrade from S&P Global, which could lower long term borrowing rates by up to 25 basis points.