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MBIA-Backed Deal in California Well Received

SAN FRANCISCO - Two California communities are using a bond program to raise funds for street improvements in a deal that closed this week and received a significant boost from MBIA Insurance Corp., according to one of the architects of the program.

The $14.7 million pooled certificate of participation deal, issued by the California Statewide Communities Development Authority, supplies funds to the cities of Coachella and Indio. It was the first new California deal with an MBIA wrap to price during 2008.

The issue uses a structure that underwriter De La Rosa & Co. inaugurated in December with a deal for Oxnard, in which bonds are backed with a pledge of future state gas tax revenue disbursements without recourse to the city's general fund.

Plans for this month's pooled bond issue faced two separate headwinds: the credit crunch and its impact on most bond insurers and the California state budget crunch. This led lawmakers to approve a bill in February that delays scheduled gas tax disbursements to cities by five months.

Concerns about those problems may have kept some potential participants in the bond pool on the sidelines for now, said John Kim, partner at De La Rosa.

But the program received some good news from the only rating agency with an underlying rating on the credit: Standard & Poor's assigned an A-minus underlying rating, while dropping previous deals using the same structure, from Oxnard and Santa Ana, one notch from A.

This was a good thing, according to Kim.

"What surprised a lot of people is we were able to confirm an A category level rating," he said. Standard & Poor's was "fully cognizant of the legislation" to delay gas tax payments.

There was also a turn in the insurance market as preparations for the deal were underway, Kim said. At first, the deal team expected that insurance would not be economically feasible because of the market's apparent lack of confidence in insurers other than Financial Security Assurance and Assured Guaranty, he said.

But things began to change. "We'd seen MBIA and Ambac [Assurance Corp.] wrapped bonds getting good bids in the secondary markets," Kim said.

MBIA had already insured the December issue by Santa Ana using the same structure.

"We worked with them and got an extremely aggressive bid," Kim said.

The results were excellent when the deal priced April 15, according to Kim. "We were able to push through the 5% yield level; in 2038 we got a 4.96% yield," he said.

The overall borrowing cost for the entire transaction was 4.28%, he said, allowing the participating cities to reap at least $450,000 in additional proceeds, even after paying for bond insurance, which cost $272,000, according to the official statement. According to a De La Rosa newsletter prepared before the deal structure was finalized, the firm was shooting for an overall cost of 5.75% if the deal went uninsured.

The day after the gas tax deal priced, MBIA also wrapped a $19 million tax allocation bond for the Clovis Public Financing Authority, which carried a top yield of 4.94% for 2037 bonds.

While they are MBIA's first California deals this year, the firm did not entirely vanish from the market after the recent turmoil; nationally the firm was credited with insuring $300 million over 13 issues in the first quarter, according to Thomson Reuters data, giving it the third place ranking, albeit a distant third behind Assured Guaranty, which was credited with $6.1 billion.

Standard & Poor's and Moody's Investors Service both have MBIA's insurer financial strength rated at triple-A with negative outlooks. Fitch Ratings rates MBIA AA with a negative outlook.

De La Rosa and the CSCDA are planning the next statewide gas tax pool bond issue for October, with several issues annually from then on.

 

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