Don't Panic.
That was the advice from more than one panelist at The Bond Buyer's Eighth Annual National Municipal Derivatives Institute yesterday in Manhattan for issuers confronted by a dysfunctional market for their auction-rate securities.
Many municipalities, along with conduit issuers and their borrowers, are scrambling to exit the auction-rate market through debt refundings or conversions and that is causing distortions in the market.
As issuers with auction-rate securities convert those bonds to variable-rate mode, they are boosting the current demand for letters of credit and lines of liquidity.
One worry is that the current quest for liquidity will resurface in later years as the LOCs that issuers have used to enhance variable-rate bonds used to refinace their ARS will need to be renewed at a later date. While bond insurance can extend for the life of the auction-rate bonds, LOCs tend to require renewals after one, three, or five years.
"That is kind of an ongoing worry," said Gary Breaux, director of finance at East Bay Municipal Utility District in San Francisco, before an audience of more than 200 municipal bankers and issuers. "That is why most of us got into auction rates in the first place. We wanted to diversify and not have to be faced with all of our variable-rate mode having liquidity every one year, three years, or five years. So this is where we are now."
Since February, EBMUD has converted all of its auction-rate debt, about $92 million, into variable-rate mode.
Yet municipalities and conduit issuers are wondering what the liquidity market will look like down the road as banks are forced to absorb losses in the housing market. As bond insurers have suffered credit rating downgrades due to foreclosures in the subprime market, so have commercial banks.
"Where are banks going to be in two to three years? They've all suffered mortgage-backed losses too, so I'm not sure banks are a panacea," said Roger Anderson, executive director of the New Jersey Educational Facilities Authority, which sells taxable and tax-exempt debt on behalf of public and private higher educational institutions in the Garden State.
Anderson also pointed out that the commercial banks are not as familiar with certain types of municipal borrowers as the monoline bond insurers.
"Insurers, they have always kind of made the distinction between the triple-Bs and the As and the banks are having trouble getting to that part of the learning curve," Anderson said. "I think banks are also having trouble understanding all the credits and the security issues. We're a conduit issuer so we're not like a [general obligation] issuer, nobody gets a GO pledge from us, and on the other hand, if it's a public college it can't get a mortgage either, and banks aren't used to that kind of security structure."
The NJEFA has sold $800 million of auction-rate securities, on behalf of various educational institutions that it anticipates refunding into fixed-rate debt or converting into variable-rate mode by the end of the first quarter.
Joseph Fichera, chief executive officer at Saber Partners LLC, offered his advice on working with outside professionals when heading to the municipal market.
"It should be no surprise that the investment bankers or the broker dealers, they were protecting their bottom line, their economic interest," Fichera said. "There's nothing really wrong with that. The point is that it may not match your economic interest all the time and that you need to be as vigorous in protecting your interest as they are in protecting their interests. That is not a question of good for bad, it is simply the way markets work. If you do not protect your own interests, you will find yourselves in the situations that we have had."
