DALLAS - The Louisiana State Bond Commission yesterday decided to delay until next year a scheduled forward-purchase sale of $485 million of gasoline and fuel tax revenue bonds to avoid a swap-termination fee of up to $25 million.
Whit Kling Jr., director of the commission, said delaying the transaction to no later than May 1 would give state officials and the commission's financial advisers time to negotiate a lower fee with the swap providers. The commission directed the commission staff to terminate the swap if market conditions improve so that the state's liability drops to $10 million or less.
"The delay will give us the option of waiting until things get better," Kling said. "The market and the time parameters in this issue are not conducive to issuing any debt."
Kling said the commission staff would continue to monitor the market.
"If the swap termination fee dips below $10 million and we determine that a termination would be in the best interest of the state, we can do so," Kling said. "This will also give us time to look for alternative means of financing if the bond market is not an option."
The sale of the bonds was originally approved in December 2006 when the bond commission authorized a forward purchase delivery contract with underwriters Morgan Keegan & Co. and Citi.
In the forward floating-to-fixed interest rate swap agreement on the bonds that was reached in December 2006, the state locked in a rate of 3.602% for the 2008 bonds.
Morgan Keegan Financial Products was awarded 50% of the swap, with Merrill Lynch Capital Services receiving 25% and Citibank NA and JPMorgan Chase each with a 12.5% portion of the swap.
Proceeds from the bonds would finance projects in the state's $4.9 billion Transportation Infrastructure Model for Economic Development program. The financing plan for the program, which is supported by four cents of Louisiana's 20 cents per gallon gasoline tax, called for the $485 million tranche to be issued no later than Dec. 1, with a $500 million issue in 2010 to complete the TIMED projects.
Freda S. Johnson, president of Government Finance Associates Inc. and financial adviser to the commission, said the state should not take the bonds to market until conditions stabilize.
"The municipal credit market is frozen," she told the commission. "I am telling my clients that unless you absolutely need the money, do not go into this market. It is ugly."
Bond counsel Meredith Hathorn of Foley & Juddell LLP also recommended a delay, noting that the state could not obtain a line of credit by the time of the scheduled sale to replace the bond insurance from CIFG Assurance NA and XL Capital Assurance Inc.
"I don't think you could even get a line of credit on a general obligation bond sale of this size by Dec. 1," she said.
The delay may be a short-term solution but there is a significant long-term problem that must be addressed soon, according to Kling.
Current collections from the dedicated gasoline tax are not sufficient to provide a one-to-one debt service coverage ratio on the $485 million of 2008 bonds, Kling said. If lower-than-expected revenues continue, he said, service on the existing debt may have to come from the 16 cents per gallon gasoline tax not specifically dedicated to support TIMED debt.
"We assumed in 2006 that we would be able to issue auction-rate parity debt in 2008 with a double-A rating," he said. "Now, forget it."
Kling said the drop in gasoline tax revenues makes it likely there will not be sufficient capacity for the $500 million tranche in 2010. In addition, he said, continued inflation in highway construction means the remaining $500 million will not be sufficient to complete the TIMED program.
The state bonds supported by the four cents per gallon gasoline tax have underlying ratings of Aa3 from Moody's Investors Service, AA-minus from Standard & Poor's, and A-plus from Fitch Ratings.
Previous bond sales for the TIMED effort include an initial $264 million in 1990, followed by a $275 million issue in 2002, $548 million in 2005, and $1.1 billion in 2006.
