The New Jersey Economic Development Authority yesterday voted to allow state Treasury officials to take action on $1.38 billion of state-backed, auction-rate securities by refinancing or converting the debt into fixed- or variable-rate bonds.
The more than $1.38 billion of debt comprises $1.3 billion of school facilities construction bonds, including Series 2004 H1-H4, Series 2005 Q1-10, and Series 2007 T1-7, and $89.2 million of 2004 business employment incentive program bonds, Series A and B. The EDA sold the debt, with the state securing the bonds with its pledge and paying debt service costs on the bonds through annual appropriation.
Over the past few weeks, the interest rates on bonds sold via Dutch auction have increased as there are more sellers of the investments than there are buyers interested in taking on the securities. That dynamic allows auctions to fail, which in turn leaves the government issuers paying higher penalty interest rates to the investors holding the bonds. Historically, the broker-dealers on such transactions have purchased debt to prevent auctions from failing, yet many banks are experiencing liquidity issues due to the fall out of the subprime market and are not willing to put up the capital to buy the remaining bonds.
Increased interest payments for the state total approximately $2 million since early February, according to Treasury spokesman Tom Vincz. While the state will absorb that additional cost with $5 million of revenue derived from swap agreements that have bode well for New Jersey during the first half of fiscal 2008, which began July 1, officials would like to restructure the state's auction-rate debt to help lower interest-rate expenses.
"Due to the increases in interest rates both on failed auctions as well as those that are clearing just below the maximum fixed rates," public finance director Nancy Feldman wrote to the EDA board, "it is necessary to request the board to approve actions necessary to adjust the interest rate mode for certain bonds and add credit enhancers that are acceptable to investors, as well as approve actions necessary to adjust the structure of swap agreements, which have been serving as hedges to the auction-rate bonds."
Of the school construction debt, current rates on the 2005 Series Q bonds range from 3.3% on the Q8 bonds to 7% on the Q2 and Q6 bonds, with rates reset as high as 10.95% on Feb. 15 on the Q5 bonds. On the 2007 Series T securities, current rates range from 5.25% on the T5 bonds to 5.5% on the T2, T4, and T6 bonds, with rates reset as high as 10.95% on Feb. 15 on the T7 bonds. Current rates on the 2004 H bonds range from 3.4% on the H2 bonds to 7.018% on the H3 bonds, the highest reset on the H1-4 bonds since late October.
The H1 and H3 bonds reset every 7 days while H2 and H4 bonds are 28-day securities.
The 2004 business employment incentive bonds currently carry reset rates of 9.255% on the Series A bonds and 4.65% on the Series B bonds.
Treasury officials are currently reviewing New Jersey's $3.4 billion of total auction-rate debt and will begin refinancing those securities into fixed-rate bonds or converting the debt into variable-rate mode once the department has evaluated the different options.
While the authority has other state-backed, auction-rate securities outstanding, the above series reflect the state's most pressing auction-rate debt sold through the EDA.
"The ones that are in the mix today have some of the higher interest rates, the highest guaranteed interest rates to them in the bond prospectuses," Vincz said. "So they wanted to take action on these particular series on a more priority basis than some of the other series that were also in play."
Treasury officials in the future may also bring before the board other SFCBs including 2004 Series J1-5, 2005 Series M1-6, and transportation project sublease revenue bonds 2003 Series A and B.
