Invesco Ltd., Waddell & Reed Financial Inc. and Alliance Bernstein Holding LP are among buyers left in limbo after Louisiana Pellets Inc., a subsidiary of the world’s biggest pellet maker in Germany, filed for Chapter 11 bankruptcy last month.
Bloomberg reports that after selling almost $300 million in municipal debt since 2013, Louisiana Pellets defaulted on some taxable bonds on Jan. 1 because its facility in Urania, a small lumber town in La Salle Parish, struggled to ramp up output to the levels projected in initial offering documents.
The project is the latest example of the risks associated with chasing yield in the portion of the $3.7 trillion municipal market that finances industrial-development projects, the segment most prone to default. Investors have had few opportunities to buy recently and a lot of money to work with: High-yield muni funds saw inflows in 93 of the 115 weeks since the start of 2014, Lipper US Fund Flows data show.
The wave of cash means “you have people jumping over themselves chasing incremental yield,” says John Bonnell, a fund manager who oversees about $10 billion of state and local-government debt at USAA Investment Management Co. in San Antonio. “There used to be a saying way back when: ‘If something couldn’t get financed in the bank market or the corporate market or the equity market, it would get done in the muni market.’”
Local authorities often issue debt for companies, hospitals and nonprofits, which back the obligations. While they often work with well-established borrowers, so-called conduits since 2014 have financed—or tried to finance—speculative projects including a sewage-to-fertilizer plant, a new home for USA Basketball and a methanol plant near Texas’s Gulf Coast that’s seeking to challenge foreign producers that dominate the business.
A Louisiana public authority issued $140 million of debt in November 2013 on behalf of the pellet company, which built a facility in Urania, which has a population of about 1,300 and is located roughly 245 miles northwest of New Orleans. Investors extracted a steep price to compensate for the risk: partially tax-exempt securities due in 2039 paid 10.5% interest, or 6.4 percentage points more than AAA munis, according to data compiled by Bloomberg. Subsequent rounds of financing came through private placements in 2014 and 2015, the data show.
