BRADENTON, Fla. — Hoping to tap a new investor base, Florida's Citizens Property Insurance Corp. plans to sell up to $2 billion of one-year tax-exempt notes Tuesday as part of a new plan to provide liquidity for the current hurricane season, which started June 1.
Investors, including money market funds previously not eligible to participate in Citizens' offerings, will learn about the newest product in a conference call today. The Series 2008A-2 offering will consist of uninsured, senior-secured notes with interest payments on Dec. 1 of this year and at maturity on June 1, 2009.
Depending on market conditions, the state-run, nonprofit property insurer expects to move forward next week with the latest new offering.
The agency was forced to defer its May 28-29 sale of up to $2 billion of tax-exempt revenue bonds with bullet maturities in 2011, 2012, and 2013 because of deteriorating market conditions. The Series 2008A-1 sale was postponed after Treasury note yields rose and the deal no longer made economic sense.
That's because Citizens plans to invest the proceeds in tax-exempt securities not subject to the alternative minimum tax. To do that and minimize arbitrage, the agency needs to secure the lowest interest rate possible, Citizens chief financial officer Sharon Binnun said.
And despite recent increases in short-term rates, she said yesterday that the economics of the Series 2008A-2 transaction make sense so far. Since many notes are taxable, Binnun also believes that Citizens may fare better on its rates because its notes are tax-exempt.
"All signs for this particular product indicate that it would make sense for us in terms of what the cost would be," she said. "We will know much more when we go to pricing next week. We will have the opportunity at that time to make a decision to move forward or sit back and wait."
Proceeds of the Series 2008A-2 notes will be invested until needed to pay claims in Citizens high-risk account, which consists of windstorm policies. The tax-exempt notes are replacing a portion of the $4.75 billion of taxable auction-rate securities the agency had used as an affordable source of liquidity until the auction-rate market melted down.
Citizens has since redeemed all of the outstanding auction-rate securities and is working on several different sources of liquidity, including next week's sale.
"Liquidity is very important for us and there's a certain amount of liquidity we need but not irrespective of what the cost is," Binnun said, adding that the agency is exercising flexibility, patience, and prudence as it attempts to sell the notes next week. "We're focusing right now on this because we think this stands a better chance of getting done at a cost we think is reasonable."
Binnun said the 2008A-1 bonds still may be sold, depending on market conditions. The preliminary official statement is still available.
Underwriters on next week's note offering are Citi, Goldman, Sachs & Co., Merrill Lynch & Co., and Morgan Stanley.
Raymond James & Associates Inc. is Citizens financial adviser. Bond counsel is Squire, Sanders & Dempsey LLP. Bryant Miller Olive PA is disclosure counsel. Nabors, Giblin & Nickerson PA is underwriters' counsel.
The notes have received short-term ratings of MIG-1 from Moody's Investors Service and SP1-plus from Standard & Poor's.
Analysts have noted that two years without a hurricane strike in Florida have left Citizens in good financial shape as it grew to become the state's largest property insurer.
And Citizens has a broad assessment base to pay claims and secure debt. Practically all property insurance policies in Florida can be assessed, up to a set cap.
Along with Citizens, the Florida Hurricane Catastrophe Fund and the Florida Insurance Guaranty Association can place assessments on all property insurance policies to pay claims and secure debt. FIGA, a nonprofit organization that serves as a backstop to private insurance companies that become insolvent, can secure debt indirectly through a conduit.
Citizens, the Cat Fund, and FIGA are all state-run, nonprofit entities.
The increasing use of the assessment base is a credit concern, according to a report by Moody's analyst Edith Behr. She said a major storm or series of storms would test the viability of the assessment procedure "during a period of great stress and the ability of the Florida economy to withstand such an event or series of events."
"If a significant hurricane were to strike, the three related state-created entities could all face challenges as they seek to bring large amounts of debt to the market and impose overlapping emergency assessments on a potentially depleted or ravaged assessment base," Behr continued.
"For longer-term securities, there is a concern that the overlapping of maximum assessments on a storm-ravaged base could contribute to mass nonpayment or state depopulation," she wrote. "The significant support and involvement of the state for these entities, and for policyholders in the state, however, makes this possibility remote."
All three entities Citizens, the Cat Fund, and FIGA have successfully placed assessments on property insurance policies to pay claims and debt.
In fact, the Cat Fund this week received authority to issue $625 million of fixed-rate revenue bonds to pay damage claims from hurricanes that impacted Florida nearly three years ago.
Because many of those are reopened or new claims from hurricane-related damages that occurred in 2005, state officials have ordered a review to determine why so many of those claims came forward within the past year.
The Cat Fund bond sale is expected to take place in early July. No ratings have been released for that transaction.
