New York yesterday signaled it will begun getting out of Financial Security Assurance Inc. insurance on its variable-rate debt with an amendment to a previously approved restructuring.
This follows action by Moody's Investors Service Monday to put its Aaa ratings on FSA and Assured Guaranty Corp. on watch for possible downgrade, citing exposure to complex credit risks and less demand for their bond insurance.
The Dormitory Authority of the State of New York yesterday approved the addition of $636.7 million of FSA-insured variable-rate demand bonds and $249.7 million of uninsured VRDBs to a previously approved restructuring of $482.7 million of bonds that it issued in 2003 under the state mental health services facilities improvement program. DASNY approved the restructuring for up to $1.45 billion, which includes cost of issuance. The debt is backed by state appropriations.
"Concerns about the future marketability of FSA-insured bonds have recently arisen and the state is contemplating its overall position in the variable-rate market," a DASNY credit summary said. "Therefore, the state would like to include all FSA-insured as well as uninsured variable-rate demand bonds as potential restructuring candidates. By including these bonds, the state will have maximum flexibility in formulating an overall restructuring plan."
Division of Budget spokesman Jeffrey Gordon said in an e-mail that the state had been "watching this situation and had already made plans to refund the portion of these bonds to remove FSA insurance for which we have the most advantageous options."
New York has $1.8 billion of state-backed variable-rate debt insured by FSA and $220 million insured by Assured. The state "will be closely monitoring the remainder of the portfolio to determine our best options going forward in reducing our exposure to bond insurers."
The state has $49.88 billion of bonds outstanding, of which $7.61 billion is variable-rate.
The amendment was not sought in response to Moody's action on Monday, said spokesman Marc Violette.
FSA spokeswoman Betsy Castenir said the company had no comment.
The restructuring could include conversion or refunding of auction-rate securities to either VRDBs with a letter of credit or fixed rate and the conversion or refunding of VRDBs to fixed rate.
The restructuring was originally approved March and included only variable-rate debt insured by MBIA Insurance Corp, XL Capital Assurance Inc., and Ambac Assurance Corp. That authorization was amended in May to allow the authority to terminate the insurance without having to do a refunding.
A date has not been set on the refundings or conversions.
JPMorgan is lead manager and Hawkins Delafield & Wood LLP is bond counsel.
In other actions yesterday, DASNY approved a change to its investment guidelines for bond proceeds.
Under the new guidelines, the kinds of investments permitted was expanded to include commercial paper issued by a domestic corporation issued with the highest short-term rating, bankers' acceptances and shares or interest in a mutual fund, partnership, or other fund provided that the investments have the highest short-term rating by at least one nationally recognized rating agency.
The board gave final approval to a $40 million fixed-rate deal on behalf of the Oneida Herkimer Madison BOCES; $38.5 million of bonds to be sold on behalf of the Bronx-Lebanon Hospital Center; and $21 million of bonds for the Smithtown Special Library District.
The board also approved the conversion of $111.1 million of MBIA-insured VRDBs issued on behalf of the University of Rochester to VRDBs with direct pay letters of credit.
Four colleges receive initial approvals for bond financings: Rochester Institute of Technology with up to $85 million; St. John Fisher College with up to $14 million; LeMoyne College with up to $14 million; and Wagner College with up to $45 million.