Florida to Refund Variable-Rate Bonds Amid Rising Rates

BRADENTON, Fla. - Florida's Cabinet yesterday authorized refunding up to $220 million of variable-rate Everglades restoration revenue bonds because some weekly reset rates are spiraling upward.

While the bonds represent the state's only variable-rate exposure, Division of Bond Finance director Ben Watkins said after the Cabinet meeting that the reset rate on $100 million of Series 2006 bonds insured by Ambac AssuranceCorp. reset at 7% on Feb. 19 and 6.5% on Feb. 12.

Feb. 12 was the first large increase on the Ambac-insured bonds that Watkins said should have been resetting in the 2% to 3% range.

The state's remaining variable-rate debt, $120 million of Series 2007 bonds, is insured by Assured Guaranty Corp., which reset between 2.1% and 2.4%.

Watkins said he asked for the ability to refund all the variable-rate debt but most likely would proceed with fixing the rate on the Ambac-insured bonds, since no problems have been experienced with the Assured Guaranty-insured bonds.

"Assured Guaranty doesn't have the same noise around the [Ambac] name so I do not expect it to deteriorate," Watkins said. "[Financial Security Assurance] and Assured Guaranty are the two insurers not having difficulty."

Fitch Ratings last month dropped Ambac's insurer financial strength rating to AA from AAA, while Standard & Poor's Monday affirmed the insurer at AAA with a negative outlook. Moody's Investors Service rates the insurer Aaa, but the rating remains on review for a possible downgrade.

Watkins noted that Ambac has plans to shore up its capacity over the coming weeks, which may resolve uncertainties that could allow the state's bonds to start trading at normal rates. If that happens, the state may not need to fix the rate, he said.

"We are in an enviable position with not having a lot of variable-rate exposure," Watkins said. Florida does not have any auction-rate exposure.

Florida's decision comes as issuers across the country look to restructure both variable-rate and auction-rate debt where interest rates have spiked.

Analysts in the last week said money market funds and other short-term investors bid up triple-A and double-A rated bonds and sold others, especially those rated A or lower and bonds where the rating of the insurer is in doubt.

The change, which led rates on The Bond Buyer's one-year note index to jump 2.09% from 1.02% last week, reflects the troubles in both the auction-rate and variable-rate demand note markets, an analyst said.

In other action at yesterday's Cabinet meeting, Watkins was authorized to seek firms interested in being in a pool of financial advisers. While his division usually acts as the state's financial adviser, there are instances, such as negotiated transactions, that the state uses an outside financial adviser.

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