Three New York issuers yesterday announced different plans to take securities out of the auction-rate market.
The Port Authority of New York and New Jersey, which saw one of its series of auction-rate securities reset at 20% last week when the auction failed to attract enough buyers, plans to get out of the auction rate market altogether while the New York City Municipal Water Finance Authority plans to convert most of its $1.02 billion of auction-rate securities to variable-rate demand bonds next month and take a wait and see approach to the remainder.
Nassau County which is exposed to the troubled auction-rate market through the bonds issued by the Nassau Interim Finance Authority has proposed selling $720 million of revenue anticipation notes as soon as next week to buy those ARS and lower the interest rate until it can find a long term solution.
The Port Authority, which refers to all its variable rate debt as versatile structure obligations, plans to take out $200 million of its $700 million of ARS with commercial paper, the authority said yesterday following the disclosure of its intent to redeem those bonds in a material event notice. The authority is still weighing options for how to refund the remaining $500 million of ARS.
"Our expectation is that we will be essentially out of this financial instrument within six to eight weeks," Port Authority executive director Anthony Shorris said. "This is an awfully sound credit it's just an instrument that was not the right one."
Shorris said the high maximum reset rate of 20% for the failed auction was set up last year "based on where the market conditions were at the time."
Some other issuers had maximum failure rates pegged to a benchmark such as the London Interbank Offered Rate and have not seen such high interest rate resets even when auctions of their ARS failed. The Port Authority had a single auction failure which reset at 20% but its other auction rate debt reset as high as 15% last week though resets this week have been lower with no failed auctions..
The commercial paper will eventually be converted into long term bonds. The ARS to be refunded are portions of Series 8A, 8B, 8C and 8D, which were sold last year and the refunding does not include the series that failed.
The authority plans to refund the bonds in mid-March.
There is a swap in place on $350 million of the ARS that will remain in place.
Meantime, the water finance authority plans to convert $684 million of ARS insured by Financial Guaranty Insurance Co. with first resolution tax-exempt VRDBs on March 18. Patrick McCoy, executive director for the authority, said that they will take a wait and see approach on the remaining $340 million of MBIA Insurance Corp. insured ARS.
One of the water finance authority's ARS auctions failed last week and reset to its maximum reset rate of 12%. In the last two weeks the authority ARS cleared but have reset at higher rates.
"We're seeing high rate resets that used to be resetting in kind of the low 3% range has now jumped into the high 5%, 6%, 7%, 8% and that's just not something we want to live with," McCoy said. "Refunding the bonds "is more cost effective than the uncertainty of a future high-interest rate environment."
Liquidity will be provided by JPMorgan, Lloyds TSB, Bank of America NA, Bank of New York, and Landesbank Baden Wurttemberg. The authority chose the liquidity providers from a request for proposals issued a few weeks ago as a precaution the face of volatility in the auction rate market, McCoy said.
Orrick Herrington & Sutcliffe LLP is bond counsel.
Nassau County has proposed selling $720 million of revenue anticipation notes to buy auction-rate securities issued by the Nassau Interim Finance Authority. At least one series of NIFA auction-rate securities failed at auction last week and reset at 15%. The plan would be a short term solution until NIFA and the county can come up with a long term solution, said Nancy Winkler, managing director at Public Financial Management Inc. the county's financial adviser.
By buying the ARS, the county would attempt to bring the interest rate down, thus preventing a failed auction and higher resets and saving the county about $535,000 a week compared to the current reset rates. NIFA issues bonds on behalf of the county backed by a county sales tax. NIFA would have 30 days to comment on the proposal. The county has sent a letter to the Securities and Exchange Commission asking for approval for the transaction.
"We just heard about the county's proposal in a very brief telephone conversation we will review their proposal as soon as we receive the details," NIFA executive director Evan Cohen said.