TUCSON - The growth of leasing may have reached its peak because of recession-induced pressures on state and local finances and a heightened wariness among buyers about the risks of lease securities, participants at a conference here said yesterday.
"I think the leasing market has peaked, at least in the West," said David Brodsly, West Coast manager of Moody's Investors Service and a former Los Angeles finance official. "It is a financing tool that can be of use primarily where the local economy and budget are growing." he said.
California and its localities, in particular, relied on leasing in the last decade of buoyant economic growth to help finance a huge caseload of capital needs. Each of those years the state sponsored about half the lease offerings nationwide, making it "the 10,000-pound gorilla in the lease market." said Steve Juarez, executive director of the California Debt Advisory Commission.
But California lease bonds and certificates of participation appear to have hit a high-water mark at more than $6 billion last year, and are declining this year due to the recession and budget cuts, he said.
After a decade of "phenomenal growth in lease debt," long-term lease obligations now "represent a significant share of local operating budgets" in the state, and are drawing more scrutiny, he said. Both Juarez and Brodsly made their remarks at a meeting of the Association for Governmental Leasing and Finance.
Brodsly said he expects the growth of leasing to level out except. among issuers who are just discovering the technique. He contended that economic sluggishness and shrinking budgets nationwide, as well as in California, will continue to take their toll on the ability of governments to issue long-term leases.
Lease issues, which typically are paid out of operating budgets, are particularly jeopardized in times of recession, he said, because that is when budgets are cut most heavily.
The financial woes of many states and cities also have resulted in their lease issues becoming less attractive to buyers because of recession-induced downgrades, he said. Lease ratings have been on a "trend downward" because of the recession and the spread between lease issues and general obligation bond ratings has been widening, he said.
Another factor that Brodsly, Juarez, and other conference speakers said is causing at least a pause in leasing's growth is the heightened sensitivity among buyers to its peculiar risks and the controversies that dog the market.
Sally Rutherford, a director at Standard & Poor's Corp., said the threat by Brevard County, Fla., to stop paying its $29 million office building lease issue for political reasons, even though it had the money to pay, really rocked lease buyers. The controversy appears far from over, she added.
Rutherford predicted that Brevard next year will follow through on its threat to hold a popular referendum on continuing payment of the lease, despite warnings by the rating agencies that doing so might result in downgrades not only of the county's leases but of its revenue bonds.
"The Brevard case has shown that no government is immune to controversy," and has caused the raters, insurance agencies, and major buyers to try to make a more thorough assessment of the political risks behind lease issues, she said.
Brodsly said the market also is starting to perceive lease securities as more likely than bonds to be affected by upheavals caused by court cases and other events.
"Leasing is an artificial creation that is vulnerable to the utterings of lawyers," he said. "It is the most vulnerable of financing tools, and that has spooked the market."
Leasing is running into a growing perception among the public, as well, that it is "a man-made creation" and a possible abuse, he said, though he added that "the public hasn't come unglued yet" over the widespread use of leasing.
Juarez said the growing consciousness about leasing among citizens group, particularly in California, could lead to attempts to subject lease issues to the same voter approval requirements as bonds. Those voter-imposed limitations were largely credited with spawning the leasing market in California and elsewhere.
Richard Raphael, managing director of Fitch Investors Service, said that while recent controversies have given the leasing market "a pause," it comes at "a good time" because investors should become more discreet about buying lease issues.
While controversies have arisen with increasing frequency and intensity, Rutherford said, state and local governments overall have maintained an excellent record on paying their lease obligations during the recession.
In the decade since leasing took off, fewer than $100 million out of $50 billion worth of private and public lease issues have ended up in default, she said.
Nevertheless, "investors are keenly aware" of leasing's problems and are going to demand that greater security and higher premiums be paid in the future, she said.
