East Baton Rouge Parish to Refund $94.2M of Bonds

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DALLAS - East Baton Rouge Parish, La.,will refund $92.5 million of adjustable-rate bonds issued in 2006 and insured by Financial Guaranty Insurance Co. with next week's negotiated sale of $94.2 million of adjustable-rate road sales tax bonds enhanced by an irrevocable letter of credit.

A direct-pay letter of credit from Dexia Credit Local will replace the FGIC policy and bring the enhanced ratings on the bonds to triple-A. The bonds are set for pricing on April 15.

The refunding is necessary because the adjustable-rate bonds could not be held by money market funds when the enhancement provided by the bond insurance policy fell below AA. When those buyers were unable to participate, the interest rate on the bonds doubled, from 3.5% to 7%, said attorney Richard Leibowitz of Breazeale, Sachse & Wilson LLP, the parish's bond counsel.

"All the pieces in the puzzle were working properly until the insurer was downgraded," he said. "The variable-rate debt was actually performing very well. It was never a question of the parish's credit going bad, but strictly a ramification of where we could sell those bonds."

Government Consultants of Louisiana Inc. is the financial adviser for the parish.

Citi is underwriter for the issue, and will serve as remarketing agent.

The bonds have underlying ratings of A2 from Moody's Investors Service, and A-plus from Standard & Poor's and Fitch Ratings. Dexia Credit Local is rated Aa1 by Moody's, AA-plus by Fitch, and AA by Standard & Poor's.

Standard & Poor's and Fitch have provided an enhanced rating of triple-A for the bonds. A Moody's analyst said the agency will provide an enhanced rating later this week.

Fitch analyst Steve Murray said the bonds received a triple-A because of the low probability that both the issuer and the bank would fail.

"It's something we haven't done very often," Murray said. "In fact, it is the first one I've been involved with.

"Basically, we look to see if both entities are separate and both are involved in the cash flow," he said. "It is a belt-and-suspenders approach."

"It is something we may see more often as we go forward, if more issuers opt for letters of credit rather than bond insurance," Murray said.

Fitch analyst Linda Friedman said the methodology can result in a rating that is up to two notches higher than the stronger of the two credits if both entities are rated A or higher; the transaction is structured such that payments from both the municipal issuer and the bank are in the flow of funds and both entities would have to fail to perform before the bonds defaulted; and if the credit of the bank and the rated obligor have no more than a medium degree of correlation.

"It's not a new policy - it's been in place for four years - but we're seeing more issuers and underwriters asking for its application," she said.

Spokesmen for Moody's and Standard & Poor's said those agencies have similar policies.

The bonds are supported by revenues from a 0.5% sales tax in the parish that was first levied in 1990. When voters approved an extension of the tax to 2030 at an election in October 2005, they also authorized the parish to issue street and infrastructure improvement bonds supported by 70% of the sales tax revenue.

Attorney Leibowitz said the parish is expecting another road bond sale of approximately $175 million sometime in the first quarter of 2009.

 

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