New Jersey is seeking letters of credit for up to $800 million of school construction debt issued by the New Jersey Economic Development Authority.
In addition, the state has said James Petrino will succeed Nancy Feldman as director of the Office of Public Finance. Feldman left the position when Gov. Chris Christie took office on Jan. 19. Petrino was deputy director under Feldman. He has been with the office for 16 years.
The state is taking LOC bids to replace a $285 million credit enhancement on Series 2008V-5 school facilities construction bonds that expires on April 29. In addition, the EDA plans to issue $500 million of new-money variable-rate debt in April or May, according to the request for bids.
New Jersey is looking for LOC capacity as the market for credit enhancement on variable-rate debt is growing, said Matt Fabian, managing director of Municipal Market Advisors. This is partly because fewer banks are using municipal securities to collateralize loans from the Federal Reserve.
The Fed in January extended $10 billion of loans collateralized by municipal debt through its discount window compared to $36 million of loans in May that were backed by municipal debt, according to monthly Fed reports entitled Credit and Liquidity Programs and the Balance Sheet.
“It’s showing that munis are becoming more liquid and that there’s better private-sector demand,” Fabian said. “It means that there’s more demand for muni credit. The banks providing the LOCs can be more comfortable because if the banks are very worried about their money funds — putting back all their munis because there’s a problem — they’re going to be more reluctant to write letters of credit because if the bonds get put back to the bank, it really hurts the profitability of providing the LOC in the first place.”
In addition, the tight LOC market could be easing up as more variable-rate bonds are being refinanced into fixed-rate mode, decreasing the need for LOCs, and banks are “getting into a better fiscal condition so they can begin to lend again,” Fabian said.
In 2009 the use of letters of credit to enhance new debt issues fell 71.8% as compared to 2008, according to data from Thomson Reuters. In January, the use of letters of credit was off by 57% compared to January 2009.
The authority’s planned $500 million variable-rate deal could pair up with a $500 million floating-to-fixed-rate derivative that will begin on May 1.
In that swap agreement, the agency pays counterparty Merrill Lynch Capital Services Inc. a fixed rate of 4.251% and receives 62% of one-month of the London Interbank Offered Rate plus 40 basis points, according to the official statement for Series 2010A and Series 2010B New Jersey Transportation Trust Fund Authority bonds, the state’s most recent OS.
The $500 million, May 1 swap with Merrill Lynch is New Jersey’s final derivative that has yet to take effect. The state has a total of 28 swaps, with 17 of those derivatives applied to JEDA school construction debt.
New Jersey pays the principal and interest payments on the NJEDA school construction debt via legislative appropriation. Standard & Poor’s and Moody’s Investors Service rate the credit AA-minus and A1, respectively. Fitch Ratings assigns its A-plus rating. The state has more than $7 billion of school construction debt outstanding, according to the NJTTFA Series 2010 OS.
New Jersey is seeking LOCs with terms of one, three, or five years. Minimum long-term and short-term ratings for enhancement providers include A2/P-1 or higher from Moody’s, A/A-1 or better from Standard & Poor’s, and A/F1 or higher from Fitch, according to the request for bids. Responses are due by March 3 at 12 p.m.
Officials anticipate selecting qualified banks on or about March 10, with final credit approval on or about March 24.
