New York's ESDC Plans to Restructure, Refund $1.51B of Variable-Rate Debt

The Empire State Development Corp. plans to restructure or refund up to $1.51 billion of New York-backed variable-rate debt within the next two months, the issuer said yesterday at a bond finance committee meeting.

The ESDC expects to refund or restructure $1.17 billion of auction-rate securities issued in 2002 to finance correctional facilities projects and $335 million of variable-rate demand personal income tax bonds issued in 2004 and insured by CIFG Guaranty. The ESDC is also known as the Urban Development Corp. The conversions could be to fixed rate, variable rate, or a combination.

"The idea is to create stability, to create predictable interest rates the state can budget for," said ESDC chief financial officer Frances Walton.

The state public authorities control board, an oversight board, will consider the restructurings at its monthly meeting today.

The correctional facilities service contract bonds were among those that experienced auction failures in mid-February. Rates on those series ranged from 3.35% to 4.5% when they first reset in January but spiked as high as 5.78% in February before coming down to rates raging from 4.07% to 5.4% this month, according to Bloomberg LP.

Nixon Peabody LLP is bond counsel on the refunding of the 2002 securities. Walton said that the amount of refunding could be lower if "other viable alternatives to refunding become available."

"Wherever we can, we're looking at the possibility ... of conversion as opposed to reissuing the new bonds," she said.

One reason for the actions is to remove bond insurance. The state plans to refund all of its insured variable -rate demand bonds to remove insurance, with the exception of Financial Security Assurance Inc., said Division of Budget spokesman Matt Anderson.

The second transaction, the refunding of the 2004 PIT bonds is being undertaken to remove CIFG insurance, which Walton said had had a negative impact on the bonds' remarketing. The ESDC is not sure what kind of interest rate it will get from the conversions or refundings but she expects removing insurance will lower rates.

The underwriters "felt that it doesn't make sense to provide them this early on, before the pricing," she said. "They should be lower because they don't have the taint of CIFG on the bonds or other insurers that have recently been in the news unfavorably."

Last month Moody's Investors Service downgraded CIFG to A1 from Aaa.

According to Division of Budget documents from February, the ESDC's state-backed bonds with swaps were $88 million mark to market in favor of the swap counterparties, meaning the corporation would have to pay to get out of the swaps.

The state plans to refund $1.79 billion of ARS next month, including the ESDC's 2002 correctional facilities bonds, according to division of budget documents. Those refundings include $177 million issued by the Dormitory Authority of the State of New York, $420 million issued by ESDC, $463.8 million by the Local Government Assistance Corp., $200.4 million of state general obligation bonds, and $530.8 million issued by the New York State Thruway Authority.

By June, the state will have refunded, converted, or defeased $3.22 billion of ARS and will only have $748.4 million of the securities remaining in its portfolio, according to documents. However, the amount may be even less, since $580 million of those remaining ARS are subseries of the 2002 correctional facilities bonds that the ESDC intends to convert or refund.

 

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