SAN FRANCISCO - Los Angeles plans to refund its Ambac Assurance Corp.-insured variable-rate demand bonds after seeing rates surge in response to the insurer's credit woes.
The nation's second-biggest city is refinancing $235.5 million of Los Angeles Convention and Exhibition Center Authority lease revenue bonds issued in 2003 because interest rates on the debt has surged since Ambac lost its triple-ratings from the three major rating agencies.
"Although, we're a double-A minus credit on our lease-revenue bonds, investors don't seem to care," said Natalie Brill, chief of debt management for the city. "It's truly investor fear of not being able to have liquidity, and our response to that is that you will always have liquidity when you have an issuer like the city of L.A."
But Brill's assurances haven't calmed investors who want nothing to do with Ambac-backed VRDOs. When remarketing is successful, the city has to pay rates approaching 8%, more than twice the rate a year ago. When remarketings fail, as they have regularly in recent months, the city ends up paying a penalty rate to its standby bond-purchase agreement banks, Dexia and JPMorgan.
"The irony of this deal is that the bank rate is very low, a little over 5%" at current market conditions, Brill said. "But it's not guaranteed it would stay there."
That uncertainty has convinced her that it's time to refinance and fix the rate on the debt. She hopes to bring a fixed-rate deal to market by mid-September.
The city will terminate the swap that synthetically fixed the variable-rate debt. The swap is currently slightly in-the-money, meaning the city will get a small payout of less than $1 million from counterparties Societe Generale S.A. and Natixis SA when it terminates the swap.
Brill said the city took bids on a letter of credit that would have allowed it to refinance with fresh VRDBs, but the prices were too high. The lease for the convention center is an abatement lease, and that pushed up the price of liquidity to a point that fixed-rate bonds made sense.
"With the quotes that were given to us, there's just few million dollars difference between fixed-rate and variable-rate debt at that point, the all in costs, so we just don't feel that it's worth the risk of doing variable-rate debt at this point," she said. "With the swap being positive, there was no downside."
This is the city's second deal to fix variable-rate debt impaired by insurer downgrades. In May, the city refunded $605 million of wastewater debt that was insured by Financial Guaranty Insurance Corp. and XL Capital Assurance Corp. It chose to keep most of that debt in variable-rate mode because the cost of liquidity was lower and the city couldn't terminate the related swap.
Los Angeles will be an active issuer over the next few months. Aside from various enterprise departments that issue their own debt - such as the Los Angeles World Airports and the Los Angeles Department of Power and Water - the city is planning to return to market to sell $101 million of general obligation bonds in early August. They will refinance as much as $140 million of Los Angeles Municipal Improvement Corpo. commercial paper with long-term debt in late August, to refund some of its $280 million of wastewater commercial paper to free up capacity under the $300 million program by late September, and to issue about $80 million of revenue bonds for its solid-waste program in November.
The exact dates and sizes of the transactions are still being planned, Brill said.
