Lower-rated borrowers that couldn't meet the Dormitory Authority of the State of New York's stringent credit requirements are likely to find the door open a little wider in the near future if staff recommendations presented yesterday are implemented.
DASNY could adopt new security guidelines as soon as next month that would allow it to publicly sell fixed-rate bonds on behalf of borrowers with unenhanced triple-B minus ratings. Under current DASNY criteria, borrowers need to have at least an A-category rating or have credit enhancement.
DASNY staff also recommended that the authority privately place bonds for unrated borrowers that are not eligible for public sale. The private placements could be structured with minimum denominations of $100,000 to ensure the sale of the bonds is limited to sophisticated investors, according to recommendations. The authority has made exceptions in the past to sell lower rated bonds and has done a handful of private placements, but the new criteria would formalize these transactions.
"When you look at the historic default rates in [the triple-B] category you're still looking at rates that are historically very low," said DASNY executive director Paul Williams Jr. "We can continue to maintain the high standards of our process and the integrity of our process even as we look to potentially do more in the private-placement arena as well as working with investment grade credits that are in the triple-B category."
The guidelines will be formalized into a proposal to be introduced at DASNY's October board meeting, though a vote won't necessarily take place next month because staff and the board may need more time to finalize the criteria and procedures, Williams said.
DASNY is considering the shift in response to turmoil in the capital markets that has made taken bond insurance away as an option for most borrowers to meet the issuer's criteria.
"Probably the biggest issue that has had an impact on our clients is the lack of bond insurance," said DASNY managing director of public finance Portia Lee.
At the end of 2007, borrowers could choose from seven triple-A insurers, but today none of those insurers have Triple-A ratings from the three major credit rating agencies.
Additionally, the collapse of the auction-rate market last year has prompted some lower rated DASNY clients to turn to variable-rate demand bonds with letters of credit, but the cost of LOC's and liquidity facilities for lower-rated institutions have increased to 250 basis points today from 125 basis points in early 2008, according to a report presented by Lee.
Some of DASNY's newer clients have sought to do variable-rate deals with LOCs and swaps but the swaps subject the borrower to counterparty risk and termination risk, the report said.
In the recent past, the health care and higher education borrowers that DASNY primarily serves could have gone through industrial development agencies, but with the expiration in January 2008 of the state law that allowed IDAs to sell bonds for civic facilities on behalf of nonprofits, that has not been an option.
DASNY staff developed the new credit criteria recommendations during the course of three workshops over the past ten months and with the help of Lamont Financial Advisors, which analyzed security guidelines of similar issuers throughout the country.
In the recent past, DASNY had discussed creating a subsidiary to sell bonds for lower-rated credits. Williams said that the authority was not pursuing that option, which would have required legislative approval. But DASNY is seeking legislation that would allow it to sell bonds for nonprofit 501(c)(3) organizations through 2010 to take advantage of changes under the federal stimulus package that increased the par amount allowed for bank qualified borrowings.
Also yesterday, DASNY gave final approval for a $370 million, 30-year bond sale on behalf of Mount Sinai School of Medicine to construct a new research facility. The board also approved a $100 million bond sale on behalf of Hospital for Special Surgery in New York City. The board gave preliminary approval for the sale of up to $4.55 billion of bonds to cover claims to the state's Special Disability Fund, which was closed to new claims in 2007.
