CHICAGO - Until recently, veteran Columbus, Ohio, auditor Hugh Dorrian's only regret about the city's floating-rate debt portfolio was that he didn't have more of it.
But that changed three weeks ago, as disruption in the credit markets sparked a rise in variable interest rates - pushing rates on Columbus' floating-rate debt up to 7.76% from 1.6% in three weeks. The bonds remarketed weekly. The spike is costing the triple-A rated city up to $150,000 a week.
Now Dorrian said he is weighing either converting the debt into a longer mode - or buying the bonds back - within the next two weeks to address the uncertainty in the floating-rate market.
"One of the frustrating things about this upheaval is it really came on rather rapidly," said Dorrian, who has been the city's elected auditor for 43 years. "Two weeks ago, I would not have believed you if you said these rates are going to 7%. My only regret in 25 years is that I did not have more floaters. The bit of irony is that Columbus was the first city to issue variable-rate bonds, in 1983 or '84."
Dorrian's conservative approach to debt is reflected in the city's debt portfolio of $2.8 billion. Only 6.25%, or $175 million, is in floating-rate mode. Having never issued auction-rate debt, the city escaped fallout from the collapse of that market earlier this year.
Like issuers across the country, Columbus has enjoyed historically low interest rates on its variable-rate debt in recent years. But amid the market turmoil of the last several weeks stemming from a liquidity crunch on Wall Street, interest rates on variable-rate debt have spiked from more traditional lower levels. The Securities Industry and Financial Markets Association Municipal Swap Index reset at 7.96% last Wednesday, up from 5.15% the week before, and 1.79% three weeks ago, according to Municipal Market Data.
Columbus' variable-rate debt consists of six series, all of which reset every Thursday. So far this year, interest rates on the city's variable-rate debt averaged 2.1%. Three weeks ago, a $45 million piece of the city's floating-rate debt was paying 1.6%. By the following week it had risen to 6.1%, and this week it is at 7.35%, according to Dorrian. Another $128 million piece is currently paying 7.76%.
"So you can see it's imperative I take some action somewhere along the line," he said.
What's particularly frustrating, he added, is that the city's triple-A rating means so little in the current market.
"I continue to read about the 'flight to quality,' " Dorrian said, referring to investors' rush to the stability of Treasuries. "We're a triple-A rated city, but I don't see anybody flighting to my quality. The thing that hurts an issuer is that this has absolutely nothing to do with credit quality; it has to do with some funds' available cash."
City officials will meet Monday with bond counsel Brickler & Eckler LLP and financial adviser Prism Municipal Advisors LLC. JPMorgan Chase Bank NA is the city's remarketing agent on the $128 million of revenue bonds sold earlier this year. Wachovia Bank NA is the remarketing agent on the $45 million piece, and Columbus-based Huntington National Bank is the remarketing agent for the remaining small piece of the debt.
The team will consider converting the debt into another mode, including a 30-day mode, six-month mode, or into long-term bonds, Dorrian said. Another possibility is buying the debt itself.
"I've never had a put that's not remarketable in my career in 43 years - but in case there were, we are prepared, and I can step up to the plate and buy all $175 million," Dorrian said. "I don't really want to do that, as I don't particularly like owning my own debt. But we can do that, and I don't think many cities can say that."
Columbus' ample liquidity comes from an investment portfolio that totals $1.343 billion, most of which is invested in Treasuries.
