Deal in Focus

Alabama To Offer $776M

BRADENTON, Fla. — The Alabama Public School and College Authority next week plans to sell $775.8 million of revenue bonds, much of which will refund outstanding debt associated with swap options that the issuer is challenging in federal court.

While the swaptions are being contested, officials and bond documents associated with the sale said the authority would make any payment required by the court to the counterparty, which is JPMorgan.

Next week’s deal is structured as $539.2 million of Series 2009A refunding bonds, $198.5 million of Series 2009B refunding bonds, and $38.1 million of Series 2009C new-money capital improvement bonds.

All the bonds are limited, uninsured obligations of the APSCA payable from pledged revenue, including sales, use, lease, gross receipts, and utility taxes that flow into the state’s Education Trust Fund.

The authority will use proceeds of the 2009C bonds for loans to local boards of education.

Proceeds of the 2009A-B bonds will be used toward refunding $698.5 million of 1998-1999 bonds related to the swaption dispute, along with refunding $48.4 million of outstanding 2001A bonds for an estimated, combined present-value savings of about $59 million, or 7.9% of the par amount to be refunded, said the APSCA’s financial adviser, Phil Dotts, president of Public FA Inc.

Dotts said the timing of the transaction and refunding the debt related to the swap is coincidental. He also pointed out that the authority has no other variable-rate debt or swaps.

The market remains at or near historic lows for most of the maturities being sold next week, which are on the short end of the curve between one and 20 years, he added.

“The attempt here is to capitalize on the market and try to get the savings that are projected and create some additional budgetary flexibility for the authority,” Dotts said. “This is being driven totally by economics and not the litigation.”

After poor market conditions yesterday forced some issuers to postpone deals, including Hawaii’s planned $655 million general obligation sale, Dotts said the actual pricing day next week is “a little fluid.”

“Market conditions next week will determine if and when pricing is done,” he said. “If the sell-off continues, that could clearly impact our plans.”

Overall, the transaction is structured to provide level debt service.

Like many entities across the country, the APSCA and the state have seen the economy take a toll on revenues. Acting state finance director Bill Newton said Alabama is dealing with declining revenue and next week’s offering should be attractive to investors.

“The feedback we are receiving from the underwriting team has been very positive,” Newton said in a statement. “Market conditions can certainly change in a hurry, of course, but we believe the combination of the strong credit ratings of the authority, the long-term prospects for the Alabama economy, and our overall track record of managing through the economic downturn will be attractive to investors.”

Fitch Ratings assigned a AA rating and a stable outlook to the bonds. Moody’s Investors Service has assigned a rating of Aa2 and a stable outlook to the bonds and $2.8 billion of outstanding debt.

Standard & Poor’s rates the deal AA with a negative outlook, but had not released a report at press time.

In connection with a June competitive deal that never sold, Standard & Poor’s said it maintained a negative outlook on its AA rating because of the swap litigation and the possibility the authority could have to make a termination payment.

While rating agencies lauded the strong financial management of state officials, who oversee the APSCA, one analyst said the pending court challenge did not reflect well on the agency.

“Although the financial implications of a negative outcome to the litigation are relatively small, the course of events leading into entering the swap option and its disposition reflect negatively on management,” said Fitch analyst Karen Krop.

The litigation revolves around swaptions the authority entered into in 2002 and 2003 with JPMorgan in connection with its Series 1998, 1999A, 1999C, and 1999D bonds.

The agency received up-front payments of $12.6 million, while JPMorgan received options on various dates that required the authority to enter swap agreements once the fixed-rate bonds were refunded into variable-rate obligations.

JPMorgan exercised its first option in June 2008, which would have required the APSCA to issue refunding bonds later that year when the variable-rate market was experiencing severe problems and costs for liquidity facilities were soaring, authority officials had said.

In the preliminary official statement for next week’s offering, the agency said that it raised concerns about market problems and other legal issues regarding the swap options with JPMorgan but was unable to negotiate a solution.

The authority in October 2008 filed for a declaratory judgment in federal court to determine its rights and obligations.

Among its claims in federal court documents, the APSCA contended that former state officials failed to comply with procedural and documentation requirements imposed by Alabama law, and that the structure of the swaptions required it to make payments that were front-end loaded in relation to the refunding bond amortization schedule.

The authority also claimed the swaptions amounted to unauthorized loans instead of hedges against interest rate risk and that the anticipated variable-rate refunding was not feasible under terms required by state law in light of the deteriorated bond market. Alabama requires a minimum of 3% savings on a refunding.

JPMorgan filed a counterclaim seeking approximately $122 million plus interest and attorneys fees for termination costs. In addition to a termination fee, the authority could be required to pay back the $12.6 million up-front payment. The trial is set for October 2010.

“The declaratory action by the authority is about establishing exactly what obligations the authority does have and when that has been determined by the federal court, the authority will pay that obligation,” Newton said. “However, we believe it is highly unlikely that the court would require the authority to repay both the initial premium that was received and also the termination fee.”

Morgan Stanley will run the books on next week’s sale. Others underwriting the deal are the Frazer Lanier Co., Joe Jolly & Co., and First Tuskegee Bank.

Bond counsel is Balch & Bingham LLP. Disclosure counsel is Bradley Arant Boult Cummings LLP. Underwriters’ counsel is Presley Burton & Collier LLC.



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