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Louisiana Avoids Larger Swap Fee

DALLAS — Louisiana will avoid $75 million of a potential $120 million in swap termination fees on a delayed issue of $485 million of fuels-tax revenue bonds with a reconfigured structure that will finance an ongoing highway improvement program for the next six to 12 months.

The State Bond Commission yesterday approved a plan to issue by May 1 $200 million of 35-year variable-rate bonds backed by a letter of credit from JPMorgan Chase Bank, and $150 million to $200 million of floating-rate bonds.

The sale of the bonds would eliminate swap termination fees on the 62.5% share of the fixed-to-floating interest rate swap reached in 2006 that is held by JPMorgan Chase Bank and Morgan Keegan Financial Products. Morgan Keegan holds 50% of the swap agreement, with JPMorgan having a 12.5% interest.

State Treasurer John Kennedy, chairman of the Bond Commission, said the remaining two swap providers — Merrill Lynch Capital Services with a 25% interest and Citibank NA with a 12.5% interest — declined to extend the swap agreement past the May 1 deadline for selling the bonds.

Whit Kling, director of the Bond Commission, said the restructured offering should provide at least $300 million to keep contractors working on the state’s Transportation Infrastructure Model for Economic Development capital improvement program and $50 million to cover potential swap termination payments to Merrill Lynch and Citibank. Without the sale, money for the highway program would run out in May.

Kling said the state expects to sell at least $150 million and as much as $200 million of the floating-rate bonds. He said the debt could include taxable or tax-exempt bonds, or possibly the new Build America Bonds.

In addition to providing the letter of credit on the $200 million of variable-rate debt, JPMorgan will serve as senior underwriter on the issue. The commission gave Kling the authority to select co-managers prior to the sale.

Kling said JPMorgan offered to provide the enhancement for a fee of 160 basis points if the term is one year, and 190 basis points for a three-year term.

However, if JPMorgan’s contract as the state’s fiscal agent is not renewed in December when it is set to expire, the rate will go up by 100 basis points. Asked by Kennedy if he had ever seen such a provision in a letter of credit, Kling said he had not.

JPMorgan was the only firm that would provide an LOC to Louisiana for the bonds, according to Kling.

Kennedy criticized the connection of the financial services contract to the terms of the letter of credit, but said the state had no choice but to accept the sole offer.

“I’m not pleased with this provision,” the treasurer said. “JPMorgan was repeatedly asked by the governor and other officials to take it out, but they would not.

“I don’t think we have any other choice, and sometimes you have to do something you don’t [want to] when it is for the greater good,” he said. “Not only is this an imposition on the state, but this is the most expensive letter of credit I’ve seen for a long time.

“It is what it is, but that doesn’t mean we have to like it.”

The state agreed in 2006 on a fixed-to-floating interest rate swap on the $485 million of fuel-tax revenue bonds. The bond were to be sold no later than Dec. 1, 2008, as insured, auction-rate debt, but the four swap providers agreed in November to an extension until May 1, 2009, due to the deteriorating capital market and downgrades of bond insurance providers.

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