SAN FRANCISCO - The Los Angeles County Metropolitan Transportation Authority plans to refinance $167 million of auction-rate securities Wednesday, as it works to clear its variable-rate debt portfolio of more than a half-billion dollars of poorly performing assets.
The authority was set to begin refinancing the debt last fall, when the bankruptcy of Lehman Brothers Holdings Inc. ushered in a new round of turmoil in the municipal bond market and a severe drought in liquidity to back muni variable-rate demand obligations.
The transportation authority - known locally as Metro - will refund its auction-rate securities issued in 2003 with VRDOs in daily mode, said assistant treasurer Michael J. Smith. He said the structure would allow Metro to maintain an existing swap on the debt.
Auctions on the outstanding ARS have been failing, prompting a penalty rate of 2.5-times the one-month London Interbank Offered Rate. While that's only about 1.25% in the current market, the rate is likely to rise in the future, and it creates a mismatch with the Libor swap, Smith said.
The authority synthetically fixed the rate on the ARS by agreeing to pay Wachovia Bank, now a part of Wells Fargo & Co., a fixed rate of 3.44% in return for 68% of the one-month Libor rate. The basis mismatch between the swap and the ARS pushes that synthetic fixed rate up by more than a full percentage point.
Smith said it took months to line up liquidity for all the VRDOs the transportation agency needs to refund in the next couple of months. JPMorgan Chase Bank is providing a standby bond purchase agreement for the new debt, and JPMorgan will be the remarketing agent. Smith refused to say how much Metro paid for the one-year liquidity agreement.
The Series 2009 A and B bonds are backed by a senior lien on Metro's Proposition C sales tax revenues. The half-cent sales tax applies to all taxable sales in Los Angeles County, the most populous county in the nation with over 10 million residents.
Standard & Poor's upgraded the long-term rating on $1.23 billion of senior-lien Proposition C debt to AA-plus from AA ahead of the new issue, despite an expected 5% decline in sales tax collections in 2009 and 2010.
"The upgrade reflects our expectation that debt service coverage will remain above that required by the transaction's covenants, so that declines in pledged revenue based on economic weakness could be weathered without what we consider material deterioration in credit quality," said Standard & Poor's analyst Ian Carroll in a report last week.
He said the authority - which is expected to post a 4.8-times coverage ratio this year - could maintain its 2-times coverage ratio covenant even if it issued another $500 million in debt, suffered a 20% drop in revenue, and got hit by 12% rates on all of its variable-rate debt.
Moody's Investors Service held its long-term rating on the bonds at A1.
Smith said Metro plans to return to market in the next month to refund about $200 million of VRDOs sold in 1993 with insurance from MBIA Insurance Corp. That deal will remove the MBIA insurance and replace liquidity from Dexia Credit Local.
After that, Metro plans to restructure about $250 million of variable-rate debt issued with bond insurance in 1992 and 2003.
