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BATA To Overhaul VR Bonds

SAN FRANCISCO - The Bay Area Toll Authority in California plans to restructure its entire $2.4 billion portfolio of Ambac Assurance Corp.-backed variable-rate debt in the coming months, its second major debt restructuring spurred by insurer downgrades this year.

BATA plans to convert $1.9 billion of insured variable-rate demand obligations to uninsured VRDOs with new liquidity facilities. It will also refund $510 million of Ambac-insured auction-rate securities with fixed-rate bonds before the end of August. With cost of issuance and $200 million of new money included, that deal will total about $800 million.

The authority preferred to refund the ARS with new variable-rate debt and had a plan in place to do that until Ambac lost its triple-A ratings, said Brian Mayhew, BATA's chief financial officer. "There just isn't enough liquidity to do variable," he said.

BATA operates seven state-owned bridges in the San Francisco Bay Area, including the San Francisco-Oakland Bay Bridge. It operates all of the region's major bridges except for the Golden Gate Bridge.

BATA is in the midst of an $8.7 billion capital plan to repair, rebuild and seismically retrofit the bridge system, and it has been a frequent issuer of variable-rate debt, selling almost $2.7 billion of variable-rate debt since 2001. It came to market last month with $500 million of variable-rate debt that refunded its XL Capital Assurance Inc.-insured ARS.

BATA hasn't yet been hit by exorbitant rates on the ARS that it's refunding, said Mayhew. The penalty rate for failed auctions on the ARS - which were issued in 2003, 2006 and 2007 - is 1.5-times the London Interbank Offered Rate. At current rates, that's meant interest rates of about 3.7%. Mayhew expects rates to head higher and wants to take the ARS out "while the market is in my favor."

BATA's outstanding ARS are synthetically fixed with interest rate swaps under which it pays fixed rates and receives variable rate payments. Because it will refund the existing variable-rate debt with fixed-rate bonds, the authority plans to enter a new interest rate swap under which it will pay a variable rate and receive a fixed rate. Essentially, the swaps will cancel each other out, leaving BATA with a fixed-rate debt.

Merrill Lynch& Co. is the book-runner in a six-firm syndicate on the deal. Citi, JPMorgan, Lehman Brothers, Morgan Stanley, and Stone & Youngberg LLC round out the underwriting team. Orrick, Herrington & SutcliffeLLP is the bond counsel, and Public Financial Management Inc. is the financial adviser.

BATA has about $4.3 billion of parity debt outstanding and plans to issue another $1.7 billion of parity debt between now and 2013. The bonds are backed by the authority's toll revenues and interest income. They are rated Aa3 by Moody's Investors Service, AA by Standard & Poor's, and AA-minus by Fitch Ratings.

BATA expects to be able to complete the biggest part of the restructuring without reissuing debt. Instead, it will convert its Ambac-insured VRDOs to uninsured VRDOs.

Ambac has agreed to give BATA the right to reinstate the insurance in three years at no cost. If Ambac's ratings have improved or the market for uninsured variable-rate debt deteriorates in the interim, BATA might take Ambac up on the offer, Mayhew said.

For now, he doesn't want any debt with Ambac insurance. Rates on BATA's Ambac-insured VRDOs jumped to as much as 9% after the insurer's downgrades and have since settled back to around 7%. That's much higher than the 1% to 1.5% rates BATA paid before the credit crunch and insurer downgrades.

Mayhew expects to pay just over 1% after refinancing without insurance.

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