Yet Another Troubled Swap

The Alabama Public School and College Authority is experiencing problems with a swap that it may have to pay $55 million to terminate.

Standard & Poor’s on Monday placed the authority’s AA rating on negative watch because of unresolved legal issues regarding a swap option that JPMorgan has exercised.

“We placed the ratings on CreditWatch with negative implications due to the potential that without guidance from a federal court, the state could refuse to pay a swap payment on May 1, 2009, which is on parity with the debt, and the potential for termination payments that could lower debt service coverage,” analyst Sussan Corson said in a release.

Last October, the authority filed a complaint in federal court asking a judge to void the swaption in question citing a number of reasons, including that it was not a legitimate hedging transaction under Alabama law.

JPMorgan filed a motion seeking to have the case dismissed, saying Alabama’s suit “is a baseless attempt by a public authority to escape its clear contractual commitments.” Attorneys for the agency in mid-December objected to dismissing the complaint and asked the judge for a full hearing.

However, no hearing dates have been scheduled in the case as of late Tuesday.

“Should the authority decide to terminate the 1998 swap option, officials currently estimate the termination cost at almost $55 million, which is payable from a parity lien on pledged revenue,” Corson said, noting that debt service coverage including the termination payment would drop to 1.17 times.

The agency also has several other swaptions and terminating those would cost approximately $131 million, according to Corson. She added that the execution of all swap options would require the state to issue about $700 million of variable-rate debt, or about 35% of the authority’s total debt profile.

Standard & Poor’s said the authority’s rating reflects strong debt service coverage by both annual and monthly pledged revenue receipts and good historical growth of pledged revenues, which state officials levy on a broad statewide base that includes state-assessed utility, sales and use taxes paid into the education trust fund.

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