N.J. Sports Agency to Refinance $455M of Variable Debt

The New Jersey Sports and Exposition Authority yesterday approved refinancing or converting its $455 million of state-backed, variable-rate debt, including auction-rate securities, to help lower rates.

The NJSEA called the special meeting in order to give state administration officials the authority to take action on the variable-rate debt. New Jersey's Treasury department is currently evaluating three NJSEA series, including variable-rate Series 1992 C, which has roughly $172 million outstanding, Series variable-rate 2002 B1 and B2 with a combined $93.5 million outstanding, and auction-rate taxable Series 2007 B2 and B3 bonds with $189 million outstanding, according to NJSEA spokesman, John Samerjan. While the authority sold the bonds, the state secured the debt with its pledge and pays debt service costs via annual appropriations.

The NJSEA board meeting follows a meeting earlier this week where the New Jersey Economic Development Authority voted to allow Treasury officials to refinance or convert to variable-rate mode $1.38 billion of state-backed, auction-rate debt that the EDA had issued.

Over the past few weeks, the interest rates on securities sold via Dutch auction have increased as there are fewer buyers of auction-rate investments than what would be necessary to clear the market. 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 fallout of the subprime mortgage market and are not willing to put up the capital to buy the remaining bonds.

The Series 1992 C bonds are 7-day variable-rate bonds insured by MBIA Insurance Corp. and over the past few months have priced as high as 4.69%, its current rate. Attached to the bonds is a floating-to-fixed rate swap agreement with the state paying a fixed rate of 5.86% and AIG Financial Products Corp., the counterparty, paying the lesser of 70% of one month of Libor or 100% of the SIFMA, according to New Jersey's most recent official statement.

The Series 2002 B1 and B2 bonds are also 7-day variable-rate bonds insured by MBIA. Series B1 and B2 carry a current interest rate of 2.83% and 2.7%, respectively. Attached to the bonds is a floating-to-fixed rate swap agreement with New Jersey paying a fixed rate of 4.5% and Merrill Lynch & Co. as counterparty paying the lesser of 70% of one month of Libor or 100% of SIFMA.

Goldman, Sachs & Co. is remarketing agent on the Series 2007 B2 and B3 bonds with MBIA insuring the securities. Series B2 re-sets weekly and has a current rate of 7.37%, with the security pricing as high as 15% on Feb. 19. Series B3 re-sets every 28 days and carries a current rate of 10%, the highest the security has priced.

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.

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 from swap agreements that have worked 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.

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