BRADENTON, Fla. - Miami-Dade County, Fla., hopes to terminate swaps insured by troubled Ambac Assurance Corp.
County Commissioners Tuesday authorized the termination of six Ambac-insured swaps and the replacement of Ambac on a seventh swap with the Bank of New York Mellon. The commissioners took the action out of concern that an Ambac insolvency would place the county in a riskier position when it came to controlling termination events, which are currently favorable for the county.
Since the counterparty to the swaps is Rice Financial Products Co., terminating some or all of them also would give the county an opportunity to diversify counterparty risk, officials told commissioners at Tuesday's meeting.
Rice could also compete to maintain its position on some or all of the transactions.
"There's not a question here of the transactions. It's the credit that's behind them," Peter Shapiro, managing director of Swap Financial Group LLC, told commissioners as the county's swap adviser. "The credit that's been behind them has been Ambac, which like most of the bond insurers was a triple-A entity for year after year, but in the financial crisis that overtook the entire financial system last year Ambac - like many other large corporations - was simply blown down. It went from triple-A to a double-C rating, which is as low as you can get without being in bankruptcy or default."
Ambac is rated CC by Standard & Poor's and Caa2 by Moody's Investment Services. The swap agreements require that the company maintain ratings of at least A-minus and A3, respectively.
The bond insurer declined to comment for this story and Rice could not be reached.
Standard & Poor's in late July slashed Ambac's financial-strength rating to junk, saying assumed losses on insured mortgage bonds could wipe out the company's equity.
Miami-Dade officials said they are happy with the swaps themselves. The swaps are floating-to-floating rate and have performed "consistently well" for more than a decade.
"The county has had a long and mutually beneficial relationship with Rice on these transactions," said memorandums presented to commissioners. "To date they have resulted in more than $63.9 million in payments to the county."
The swaps cover a notional amount of approximately $700 million of debt. It was sold to provide funds for the county's water and sewer department and solid waste department, to leverage the convention development tax, and for a project funded with one series of industrial development bonds.
The cash flow from the swaps has consistently been positive to the county, Shapiro said yesterday in an interview with The Bond Buyer.
He also said that since the swaps represent large positions, which were put in place "with care" over a number of years, the county has several options as it proceeds.
Miami-Dade can simply replace Ambac as the guarantor or replace both the counterparty and the guarantor.
"The county can control the termination process and restructure the swaps in a manner that maintains the positive benefits of the swaps for the county, and get rid of the negative, which is Ambac," Shapiro said, noting that the insurer will be responsible for transactional costs.
Under terms of the swap contracts, the transactional costs would be determined by obtaining market quotations from other swap dealers on what they would pay, or receive, to step into Ambac's place, Shapiro explained.
County commissioners approved seeking competitive bids for the underlying floating-rate basis swaps. Such swaps currently make up 10% to 20% of the swap market and, according to Shapiro, are less volatile than the more common variable-to-fixed rate swaps.
"These are swaps where it's one floating rate versus another floating rate so that it tends to be the case that floating rates zig and zag more or less together," he told county commissioners on Tuesday. "These are not without risk altogether but there's a big cushion built into these swaps to help absorb that risk, what's referred to in the swap as a constant, and that constant in these swaps is actually quite large so it does buffer the risk."
Shapiro said the constant is 160 basis points, which means the two floating rates would have to move more than 160 basis points before the county would have to pay.
In a 20-year analysis to determine how well the swaps performed, Shapiro said there was no fiscal year in which the swaps generated negative cash flow for Miami-Dade. He also described the risk-reward ratio as "very much in the county's favor."
The swaps have had the effect of reducing the net debt-service payments significantly, and "in good times and in bad" they are performing very favorably, county manager George Burgess told commissioners on Tuesday.
Terminating Ambac gives Miami-Dade an opportunity to replace the counterparties when the market is most favorable for the county, officials said, which could also make it attractive to enter into new swap contracts.
If the insurer declared bankruptcy prior to the county terminating the agreements, "Ambac would be the party to determine when to terminate the transactions," county documents said. "Ambac would most likely choose market conditions that are more favorable to itself."
Miami-Dade County's general obligation rating is AA-minus from Fitch Ratings and Standard & Poor's, and Aa3 from Moody's.
