BRADENTON, Fla. - Confusion over the outlook for the rating of the Alabama Public School and College Authority may have contributed to the failure of the refunding and new-money deal to sell last week, several market players said on Friday.
The APSCA did not receive any competitive bids Thursday for its $284.8 million current refunding piece.
Only one bid was submitted for a $39.6 million new-money piece and it didn't meet bid parameters, said Phil Dotts, president of Public FA Inc., the authority's financial adviser along with First Tuskegee Bank.
"We really expected to see bids from all those who signed up," Dotts said, adding that 10 prospective bidders - five for each piece - signed up for the deal and others indicated they were going to bid.
The state also received wire transfers for good-faith money in advance of the sale and one even came in the morning of the sale, according to Dotts.
"All kinds of things affect bids and competitive sales, not the least of which is the direction of the market, the day of the week, and clearly we had a present-value savings threshold we had to meet on the refunding that might be part of this," Dotts said, noting that Alabama requires a minimum of 3% savings on a refunding.
He also pointed out that the market eroded considerably from June 1 through the day of the sale, and prospective bidders "could have had indigestion from the volume that showed up earlier in the week."
A trader and a municipal analyst both said it was a difficult market the day of the sale and they were under the impression that Standard & Poor's still had the APSCA on negative watch for a downgrade due to a pending federal lawsuit in which the authority is seeking to void several swap contracts with JPMorgan.
Standard & Poor's did place the agency on watch for downgrade March 27, saying it believed that the swaps in question were on parity with the authority's debt payments. But on April 28, Standard & Poor's removed the APSCA from negative watch - but maintained a negative outlook - after being assured the authority did not grant "as security for swap payments, a lien on any revenue pledged as security for the bonds," the agency said at the time.
Municipal Market Advisors managing director Matt Fabian observed the APSCA "was a large deal coming in what was a very difficult market with dealers already running large unsold balances prior to the [Alabama] sale."
One trader said there could have been a spillover effect from the financial difficulties facing Jefferson County, Ala., and its sewer system, which also involves JPMorgan as the county's largest creditor and swap counterparty.
"It could have been perceived to be not a clean deal in a bad market," the trader said.
Dotts indicated surprise that there continued to be an impression in the market that the APSCA was being considered for a downgrade. He did acknowledged that Standard & Poor's maintained a negative outlook on the AA rating because of the swap litigation and the possibility the authority could have to make a termination payment.
"We still take exception to that [negative outlook] because we don't think it raises that level of concern," Dotts said. "These are legal issues and the state has said many times it's going to honor and respect any obligations they've got, and pay them."
Moody's Investors Service has maintained a stable outlook on the authority, and assigned a Aa2 rating to the bonds that were to be sold last week.
The APSCA last October filed a complaint in federal court asking a judge to void four swap options that it agreed to in 2002 and amended in 2003 with JPMorgan. For the original swap agreements, it received $12.58 million upfront in return for options to enter into swaps in the future on the authority's 1998 and 1999 bonds.
A year ago, JPMorgan exercised one of its options, which would have required the APSCA to issue variable-rate refunding bonds by Nov. 1. The authority said due to market conditions it could not feasibly issue variable-rate debt and questioned the legality of the swap agreements in the federal court case.
No swap payments have been made though they were to begin in May 1.
JPMorgan notified the authority that May 13 would be the early termination date for all of the swaps and calculated the termination fee at $122 million, according to a disclosure in bond documents for the APSCA's sale last week.
The federal judge assigned to the case has yet to schedule a hearing.
