DALLAS — The Louisiana Bond Commission gave its approval yesterday to the state holding onto 99% of the Louisiana Superdome's outstanding auction-rate securities for another year.
Bond counsel Meredith Hathorn of Foley & Juddell LLP said the Internal Revenue Service had assured her that it will grant a one-year extension of the ability to hold the bonds without their tax-exempt status being lost. The current approval will expire Dec. 31, Hathorn said, but an extension is almost sure.
"I'm beyond cautiously optimistic," she said. "I expect that ruling next week."
Without a favorable ruling, Hathorn said, the Superdome bonds would lose their tax-exempt status.
"They would then have to be sold as taxable bonds, which we estimate would add about 200 basis points to the rate paid by the district," she said.
The Louisiana Stadium and Exposition District issued the $294.3 million of auction-rate bonds in 2006 in a deal underwritten by Merrill Lynch & Co. and insured by Financial Guaranty Insurance Co.
The state acquired $225.8 million of the bonds as an investment in April 2008 after bond auctions failed due to downgrades of FGIC's rating.
The district asked the state to purchase the bonds when the interest rate on the debt went to more than 12% from approximately 4% due to the failed auctions. The resetting of the interest rates from the failed auctions added $1.8 million a month to the district's debt service that had fluctuated between $300,000 and $450,000 a month.
Hathorn said since the state acquired the bonds, the interest rate has fluctuated between 3% and 1.25%.
Gov. Bobby Jindal has certified that it is in the best interest of the state to continue holding the debt, Hathorn said. The Joint Legislative Committee on the Budget is expected today to approve the continued holding of the Superdome debt.
The commission went into an executive session to hear an update on a lawsuit involving the bonds. The state and the Superdome district are suing Merrill Lynch in state and federal courts over alleged security law violation. The district said it was misled by Merrill Lynch over the potential volatility of the auction-rate bonds.
The Superdome district oversees the Louisiana Superdome, home of the New Orleans Saints of the National Football League, and the adjacent New Orleans Arena, home of the New Orleans Hornets of the National Basketball League.
The district's credit was downgraded to Ba1 by Moody's Investors Service and to B by Standard & Poor's after Hurricane Katrina in 2005. Moody's bumped the rating up to a barely investment-grade level of Baa3 before the sale, but the district said it did not seek a new rating from Standard & Poor's because the agency probably would not have raised the bonds above junk status.
The bonds are supported through Superdome revenues and the district's 4% hotel-motel tax.
