San Diego County OKs $485M ARS Refunding, $395M Revenue Issue

SAN FRANCISCO - The San Diego County Board of Supervisors this week approved plans to refund $485 million of auction-rate pension obligation bonds and to issue up $395 million of lease revenue bonds for construction of a new county operations center.

The county plans to pay down $44 million of the taxable pension debt and to refinance $441 million over 22 years. The deal, slated for sale sometime in late July, will include as much as $100 million of variable-rate debt.

"By leaving a portion of the refinancing in variable rate, we preserve the option of continuing our practice of paying down debt early," chief financial officer Don Steuer told the county board Tuesday. The board unanimously approved the refunding.

San Diego County's auction-rate pension bonds were issued in 2002 and its auctions have failed since mid-February, forcing the county to pay a penalty rate of 6.8%, up from 5.3% before the meltdown in the auction-rate securities market. The penalty rate equals the one-month London Interbank Offering Rate plus 150 basis points and the higher rate has cost the county an extra $600,000 a month.

The original pension deal was insured by MBIA Insurance Corp., but the county plans to rely on its own credit for the ARS refunding. The pension obligation bonds are rated Aa3 by Moody's Investors Service and AAby both Standard & Poor's and Fitch Ratings.

The county will terminate a swap that synthetically fixes the rate on $405 million of the debt, finance director Ebony Shelton said in an interview. Under the swap agreement, the county pays a fixed rate of 5.3% of the notional value to counterparties Citi and Morgan Stanley in exchange for Libor. The swap termination fee would have been $19 million on May 30 and will vary with interest rates between now and the time of the refunding.

Finance officials decided to terminate the swap and go with a mostly fixed-rate refunding because the swap payments, like the bonds, are insured by MBIA. Its financial adviser, Gardner, Underwood & Bacon LLC, told the county it was unsure if the swap insurance policy would remain in effect after the bonds were refunded.

Even if it could have kept the swap insurance in place, the county would have had trouble finding a liquidity facility for $405 million of variable-rate demand obligations, advisers told the county. Landesbank Baden-Wuerttemberg will be liquidity provider on the variable-rate portion of the refunding.

Citi is the book-runner on the deal, which is expected to yield about $35 million of net present value savings compared to the poorly functioning ARS. Morgan Stanley is co-senior managing underwriter, and De La Rosa & Co. is a managing underwriter.

The county board also approved the sale of up to $395 million of new-money lease revenue bonds to finance construction of a new county operations center. Finance officials plan to bring the bonds to market in early October.

The deal - to be issued by the San Diego County Regional Building Authority - will finance the first phase of construction in the redevelopment of the county's $531 million, 37-acre administrative campus in Kearny Mesa, just north of downtown San Diego. The county will replace a hodgepodge of 40-year-old buildings that needed substantial repairs with six four-story office buildings, a conference center, and two parking garages.

Officials haven't finalized a structure for the deal.

Goldman, Sachs & Co. is senior managing underwriter on the deal. Citi is co-senior managing underwriter, and Loop Capital Markets LLC is co-managing underwriter.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER