New York plans to refund $2 billion of its $4 billion of state-backed auction-rate securities and to convert $750 million of variable-rate demand bonds into fixed-rate mode, state budget director Laura Anglin said yesterday.
"Our main focus is to try to reduce our exposure to the auction-rate bonds that are mostly tied to the weak insurers," Anglin said. Those insurers include Financial Guaranty Insurance Co., CIFG Assurance North America Inc. and XL Capital Assurance Inc., she said.
The first conversion out of ARS is expected later this month when the state converts $442 million of bonds issued by the Tobacco Settlement Corp. to a fixed rate.
"Those are ones that have the highest maximum resets of about 15% so we automatically took action to start the process of fixing those out once the turmoil began," Anglin said. In recent weeks the bonds reset to a high of around 7%, she said. "We were fortunate that they never hit their max rate but still there's an exposure there you don't want to continue to have."
About $8.2 billion of the state's approximately $50 billion of debt is in variable-rate mode. The state and the authorities that issue debt on its behalf are reviewing responses to a request for proposals for liquidity providers to convert ARS to VRDBs.
The roll out of conversions will be stretched out over an as yet undefined period of time because the state has to schedule the refunding in with its regular bond schedule and needs board approval for debt issued by authorities. The state is still making decisions on which bonds to refund and working on a long term plan to figure out what to do with its remaining $2 billion of ARS.
"Some are uninsured or tied to healthy insurers, in addition some have max reset rates that are, compared to others, reasonable, they've been in 3.5% range, on those we have less exposure so we want to be sure we take care of the riskier ones first," Anglin said.
In the meantime, the state is working with investment banks and remarketing agents to "aggressively remarket these bonds so that people know that it is our security and our credit that backs them," Anglin said.
The $750 million of variable-rate demand bonds to be refunded are insured by FGIC and CIFG and are to be converted to either uninsured VRDBs, fixed rate bonds or a combination of both.
The state has a notional $5.96 billion of variable to fixed-rate swaps outstanding on state-backed debt. As of December the mark-to-market value of those swaps-the cost to terminate all of them-was negative $158.7 million to the state. The mark-to-market value is now around negative $200 million, Anglin said. The state expects the swaps on ARS can remain in place on those that are converted to VRDBs.
"Absent any actions the state would face increased interest costs," Anglin said. "I think now the additional cost will be fairly minimal-if you look at the overall size of the state's budget." Anglin said she was not concerned about a substantial risk to the state financial plan based on increased costs from its swaps.
Taking steps similar to the Connecticut Housing Finance Authority, the state is looking to negotiate changes in its standby bond purchase agreements on bonds issued on its personal income tax credit and through the Local Government Assistance Corp. so that changes to insurer credit ratings will not trigger termination events.
"We basically want them to look toward our credit and not the credit of insurer since we have a very strong credit," Anglin said.
Such changes would require the consent of the commercial banks with the standby purchase agreements.
The state is not looking to purchase its own ARS or utilize pension funds to shore up its auctions, Anglin said.
Refunding and aggressive remarketing would probably be a "quicker thing to do than try to figure out the legalities of using the pension system or other pension systems. There's a lot of legal questions that are unanswered now so we're trying to take a more proactive stance of remarketing the bonds instead of trying to go a route that will require a lot of legal interpretation."