BRADENTON, Fla. - Florida's Citizens Property Insurance Corp. yesterday authorized the sale of between $1.5 billion and $2 billion of tax-exempt bonds as part of its restructuring plan designed to extricate itself from the troubled auction-rate securities market.
Because of continuing volatile market conditions, the exact amount of debt to be sold most likely won't be determined until pricing, which is expected at the end of April or the beginning of May. It is also likely that the fixed-rate bonds won't be insured, although Citizens is keeping that option open if cost-effective insurance becomes available when the deal is priced.
Even the exact maturity schedule is unknown at this point, but Citizens financial adviser, Raymond James & Associates Inc., expects the bonds to mature in six years or less. And it is possible that the agency may elect to offer a different product, even taxable debt, at the last minute.
Citizens' board of governors in a special meeting early yesterday morning authorized the upcoming bond transaction with as much flexibility as possible because of changeable market conditions.
But right now investors have an appetite for tax-exempt bonds, Sharon Binnun, Citizens' chief financial officer, said after yesterday's meeting at which the board of governors approved bond documents. Short-term maturities will offer the state-run insurer the lowest interest rates.
"The overall auction-rate market is not viable for us because investors are not as interested in investing in that market," Binnun said. "Right now it appears that with a fixed-rate, short-term financing we'll at least know the maximum interest expense we will have to pay for these bonds as opposed to the situation we have now."
For many years, taxable auction-rate securities met Citizens' needs cost effectively. Because they were taxable securities, the agency could invest the proceeds free from Internal Revenue Service arbitrage restrictions, pay the debt service with investment proceeds, and break even or better, Binnun said.
But that all changed when the subprime meltdown began to impact the auction-rate market.
To prevent failed auctions, the agency bought back $2.4 billion of its own $4.75 billion of taxable auction-rate securities. Still, the agency suffered from soaring double-digit interest rates, which exceeded earnings on invested proceeds. It has issued conditional redemption notices for all of its auction-rate securities.
"What it looks like is the market is most receptive to tax-exempt," Binnun said.
If the current financing plan is followed, it will be the first time in the state-run, nonprofit insurer's six-year history that it will sell tax-exempt debt to provide liquidity in case funds are needed to pay claims immediately after a hurricane, also known as pre-event liquidity.
The proceeds will be invested but subject to IRS regulations governing arbitrage. And unlike past issuances, interest on investments are not expected to cover debt service so Citizens will also use policy premiums to pay debt service.
"I think it's notable that this will be the first time that Citizens actually issues pre-event bonds on a tax-exempt basis," Albert del Castillo, Citizens' bond counsel with Squire, Sanders & DempseyLLP, told the board of governors yesterday as he discussed the bond documents that were approved.
As currently envisioned, the transaction will have a maximum true interest cost not to exceed 4.25%. It is also expected to have optional redemption provisions with premiums not to exceed 1%. The purchase price of the bonds by the underwriters cannot be less than 99.6% of the principal amount of the bonds, del Castillo said.
Senior underwriters on the deal will be Citi, Goldman, Sachs& Co., Morgan Stanley, and UBS Securities LLC. Co-managers have not yet been selected.
Bryant Miller OlivePA is disclosure counsel. Nabors, Giblin & NickersonPA is underwriters' counsel. The sale still must be approved by Florida's Office of Insurance Regulation. After that approval, there is a 30-day waiting period in which the sale can be appealed.
In addition to the tax-exempt financing, Citizens is negotiating with a number of investment banks in hopes of getting up to a $2 billion line of credit as another part of its restructured liquidity plan.
Citizens also is working to convert up to $1 billion of auction-rate securities to variable-rate demand notes with Financial Security Assurance as the insurer, and its parent company, Dexia SA, providing a liquidity facility.
Citizens sells property insurance throughout Florida because there aren't enough private insurance companies willing to write policies in the hurricane-vulnerable state. Many of Citizens' policies are in the high-risk coastal areas, but others are spread across the less-vulnerable interior areas of the state. The agency has 1.2 million policyholders with an exposure of $460 billion.