WASHINGTON - Georgetown University this week restructured $115 million of auction-rate securities into variable-rate demand obligations using an increasingly popular technique: leveraging joint support from both the liquidity provider and the issuer.
Rating agencies say the technique is becoming increasingly popular among issuers that convert ARS to VRDOs and essentially allows default risk to be spread among the provider of the VRDO's letter of credit and the issuer so that the securities will be assigned a higher credit rating.
Georgetown's VRDOs, which were originally sold as two series of ARS last year that were issued through the District of Columbia and insured by Ambac Assurance Corp., were rated triple-A by both Standard & Poor's and Moody's Investors Service. That compares to the ARS' original underlying ratings of A-minus and A3, respectively, as well as respective ratings of double-A and triple-A for JP Morgan Chase Bank NA, the liquidity provider for the VRDOs.
Goldman, Sachs & Co. and PNC Capital Markets served as remarketing agents on the transaction. Public Financial Management was financial adviser, Squire, Sanders & Dempsey LLP was bond counsel and Arent Fox PLLC served as borrower's counsel.
In their rating reports following the conversion, both Standard & Poor's and Moody's gave the university a stable outlook, with short-term ratings of A1-plus and VMIG-1, respectively, that reflect the put option on the VRDOs.
Mary Peloquin-Dodd, a managing director at Standard & Poor's, said that historically, bank-provided LOC financings are rated solely on the basis of the LOC. But given the economic environment, issuers have been trying to pledge their own credit to obtain a higher rating for their bonds.
"It's becoming increasingly common," she said. "It's a way of insuring that the ratings don't fall if, for whatever reason, the bank ratings fall ... It gives additional protection in credit and subsequently for the ratings."
Joann Hempel, an analyst at Moody's, said that historically the rating agency rates about 60 such deals each year. But already this year Moody's has rated about 150 of these deals, the majority of which were issued by, or on behalf of, higher education and health care institutions.
Georgetown's conversion comes after it, along with several other issuers, were hit hard by the collapse of the auction-rate securities market in February.
Earlier this fall, Georgetown started the process of converting about $550 million of its ARS to fixed-rate and variable-rate debt, beginning with a conversion in late September of $214.7 million of ARS.
Going forward, it plans to refund during the spring about $185 million of ARS sold in 1999, according to David Rubenstein, associate vice president of financial planning and analysis for the university.
