MWAA to Convert $141 Million of Auction-Rate Securities to VRDOs

WASHINGTON - The Metropolitan Washington Airports Authority will convert a total of $141 million of auction-rate securities to variable-rate demand obligations March 13, an authority official said yesterday.

MWAA chief financial officer Lynn Hampton said the authority has been considering converting its auction rates to VRDOs since last October, but decided to wait until January before going ahead.

"We started last October, going to our board with the issue," she said. "[But] our board wanted to wait until the beginning of the year because at that point the problem had not bled over into the municipal market. Then in January our board authorized us to move forward."

Under the transaction, the MWAA will convert two $70.5 million tranches of ARS debt, which were issued in 2003 to help finance airport improvements, Hampton said. The authority operates Dulles International Airport and Ronald Reagan National Airport. The VDROs will be supported by letters of credit from Wachovia Bank NA and Regions Bank.

VDROs are a type of short-term debt where the yield is reset on a daily or weekly basis, and is typically determined according to an index of short-term municipal rates. The bonds, which have long-term maturities, guarantee liquidity by including a put option that allows the bondholder to require the purchase of the bonds by the issuer or by a specified third party.

Similar to VDROs, auction-rate securities are variable-rate bonds whose interest rate is reset periodically, but through a Dutch auction. However, because they do not carry a put feature, ARS debt is highly sensitive to changes in the issuer's credit ratings and normally require the highest ratings to make them marketable, which is usually achieved with bond insurance.

Recently, a number of ARS auctions have failed as Fitch Ratings, Standard & Poor's, and Moody's Investors Service have lowered, or threatened to lower, the credit ratings of many several of the nation's bond insurers. A rating downgrade adversely affects the rating on the insured bonds. Bond insurers with significant exposure to debt backed by subprime mortgage loans have faced difficult financial troubles as those mortgages have defaulted in record numbers.

An ARS auction fails when there are not enough orders to purchase all the shares being sold. Under this scenario, the rate is set to the maximum rate defined in the offering documents.

To date, only one ARS auction by the MWAA has failed, Hampton said. The rate on the bonds, which were auctioned in mid-February, reset to 7.8%, which is higher than the 4.9% the ARS bonds yielded in January and the 4.2% yield in December.

The struggles of the bond insurers have not had too much effect on other MWAA insured debt, Hampton said.

In one instance, the authority put up $13 million to backstop a debt service reserve fund, known as a surety, that had been insured by Financial Guaranty Insurance Co. In recent weeks, Standard & Poor's had downgraded FGIC to A from AA, Moody's has lowered it to A3 from AAA, and Fitch had dropped it to AA from AAA.

"If and when FGIC becomes healthy we will be able to take the money out," Hampton said. "We did not get rid of the surety, it is there, but we have cash funded it for investors."

The MWAA also has some debt principal insured by Financial Security Assurance Inc. as part of a liquidity facility, Hampton said. But FSA continues to maintain its triple-A rating.

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