Regional News

Switching Bad VR Debt

SAN FRANCISCO -The Los Angeles Unified School District plans to refund $120.9 million of Ambac Assurance Corp.-insured variable-rate demand obligations early next month after seeing rates on the debt surge to as much as 10% after the insurer's credit ratings were cut.

The outstanding certificates of participation were issued in 2005 and are insured by Ambac with a liquidity facility from Dexia Group. Rates on the debt jumped after Ambac's credit ratings were slashed by the three major rating agencies earlier this year.

"Because of the downgrades and market nervousness over Ambac, the current COPs have been getting weekly resets anywhere from 150 to 850 basis points above market rates," said Jean Marie Buckley, president of Tamalpais Advisors Inc., the district's financial adviser. The debt financed acquisition and improvement costs at the district's headquarters in downtown Los Angeles.

LAUSD, the nation's second-largest school system, will replace the outstanding COPs with new variable-rate demand obligations backed by a Bank of Americaletter of credit.

"The district feels that having some variable-rate exposure is a good thing," said Tim Rosnick, director of treasury and accounting controls. "We don't have a lot of it, but we do feel that over the long term, we can save money by having some variable-rate exposure, although we've recently been paying a pretty big penalty for having the Ambac [insurance]."

LAUSD plans to price the refunding on or about Aug. 5. It will issue the certificates in two series. Series A includes $97.5 million of COPs that mature in 2024; Banc of America SecuritiesLLC will be the remarketing agent. Series B includes $23.4 million of debt maturing in 2031 with De La Rosa& Co.as remarketing agent.

Banc of America is the senior manager on the new issue and De La Rosa is co-manager.

District officials met with rating analysts in New York last week. The school system's outstanding COPs carry underlying ratings of A1 from Moody's Investors Service, A-plus from Standard & Poor's, and A from Fitch Ratings.

The district is also planning to bring its annual offering of tax and revenue anticipation notes to market on July 23 in a $500 million issue. Banc of America is senior manager of a four-firm syndicate selling the Trans, which mature in 12 months.

This year's issue is smaller than the $600 million of Trans sold last year and is coming to the market earlier in the year, Rosnick said. The district's schedule was moved up because California decided to delay its usual July state aid payments until September.

LAUSD is one of California's most active issuers and is in the midst of a $20.9 billion school rebuilding campaign. The district has about $5.7 billion of capacity remaining under four separate general obligation bond authorizations.

Officials plan to issue $950 million of GOs during the 2008-2009 fiscal year, and the district Board of Education is already planning for another bond election that may expand the program by another $3.2 billion, though the exact size of the request and the project list have not been finalized.

LAUSD's GO bonds are rated AA-minus by Standard & Poor's, Aa3 by Moody's, and A-plus by Fitch.



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