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GO Zone Cut-Off Looms for Issuers

BRADENTON, Fla. — Three Gulf Coast states are trying to beat the deadline to sell billions of dollars of private-activity bonds allocated by Congress in the 2005 Gulf Opportunity Zone Act.

The bonds, which Congress hoped would stimulate economic recovery in Louisiana, Mississippi, and Alabama following Hurricanes Katrina and Rita, must be sold by Jan. 2.

Louisiana received an allocation of $7.84 billion but $972 million must be sold in the remaining four months of the year.

Mississippi received $4.9 billion but $1.86 billion remains to be sold by the expiration date or the authorization will be lost.

Alabama was awarded $2.42 billion but $956 million still must be issued.

Most GO Zone bonds have been sold as unrated debt to finance specific economic development projects.

While some of the debt to be sold has been allotted to projects, or will be allotted shortly, most of the states expect to have more requests for GO Zone bonds than they have the authority to sell. But the GO Zone bond program has run into obstacles as the Gulf Coast has suffered the ravages of the recession, the bond market meltdown, and recently the worst oil spill in U.S. history.

Some analysts and supporters of the program originally felt it would be difficult to sell the huge amount of debt in a short period of time. Many local officials managing the GO Zone programs believe Congress should extend the deadline for the bonds to be sold given difficulties accessing the bond market that were beyond their control. But Congress has moved on to other issues and the time for action is running out.

The slowdown in the economy seriously affected the ability and willingness of companies to borrow money, according to Louisiana Treasurer John Kennedy, who chairs the State Bond Commission.

“The crash of the capital markets over the past two years has hurt,” he said. “I am hopeful that we can end the year with a very low amount of unsold bonds.” He sees little chance the program will be extended past its deadline of Dec. 31.

“There has been a great deal of discussion about an extension, but I don’t expect it to happen,” Kennedy said. “It would take the pressure off us. However, Congress is facing significant financial questions and an extension is not likely.”

An extension of the GO Zone bond program was proposed recently in a bill before Congress but it was stripped from the measure before passage, officials said.

GO Zone issuance in Mississippi has been hindered by the market meltdown.

State officials are working closely with congressional delegates for an extension of the sale deadline, said Kathy Gelston, chief financial officer for the Mississippi Development Authority.

“We’ve had probably $600 million worth of requests in the past 45 days,” Gelston said. “I think it’s just that time is running out.”

Most of the debt issued in Mississippi’s GO Zone program has been sold as variable-rate demand bonds backed by letters of credit. The program was structured that way because many of the bonds were for entities that could not obtain a rating, said F.M. Bush, a bond attorney in the Mississippi office of Phelps Dunbar LLP.

Issuance was delayed by liquidity problems in the bond market, he said, adding: “There was considerable anxiety when the regional banks were downgraded.”

The downgrades and soaring costs for LOCs affected the ability of Mississippi deals to come to market during the financial crisis. It wasn’t until after Congress allowed the Federal Home Loan Bank to issue confirming letters of credit for tax-exempt bonds in July 2008 that the situation began to ease.

“That was a godsend because the Federal Home Loan Bank was able to issue confirming letters of credit to backstop the primary LOC provider,” Bush said. He favors an extension of the deadline to sell the bonds.

Gelston said her office has seen one LOC with a GO Zone bond application in the past 18 months. She also said there were six to eight months during the credit crisis that her office didn’t receive requests for bond allocations. “We thought we were about to end up with billions in allocations that went unused because nobody was asking for it,” Gelston said.

But in addition to a recent surge for GO Zone bonds in Mississippi, a project sponsor has come forward asking for any remaining capacity that cannot be used by others, Gelston said. She declined to identify the sponsor.

“I believe that we will allocate the entire amount, although it is possible that some will not close on their bond sales before end of year,” she said.

With more requests for GO Zone bonds than Alabama has to allocate, Gov. Bob Riley believes the program has been successful, said Gina Smith, spokeswoman for the Alabama Finance Department.

“Gov. Riley supports extending the deadline for the sale of the existing allocation and increasing the allocation amount,” she said.

Louisiana should end the year with little or no remaining GO Zone bond capacity, Kennedy said, but the program did not accomplish the goal of producing projects in the most affected parishes. While the Bond Commission set aside $2 billion for projects in hard-hit Orleans Parish, few of them have closed on their allocations.

“This is about spending by the private sector,” Kennedy said. “This is not government spending. The government cannot force the private sector to invest money, and they did not want to do that in Orleans Parish.”

There were reports that some investors were reluctant to build in some parts of Orleans Parish because there is still work needed to repair the levees that failed and led to the flooding of the city.

The  problem has to do with credit, not the bond program itself, according to Buck Landry, managing director at Morgan Keegan & Co. and head of the firm’s offices in New Orleans and Baton Rouge.

“The strength of the credit of the company backing the bonds was the determining factor in whether the bonds would sell or not,” Landry said. “Just getting the bonds allocated to your project wasn’t the determining factor.

“Investors still want to be paid and after the storm there was a degree of uncertainty about New Orleans. The money just stayed away from Orleans Parish,” he said.

A federal bond guarantee program may have been more effective than the tax-exempt private-activity bond effort in restoring credit to the New Orleans economy, Landry said.

Landry, whose firm has worked on GO Zone bond deals in all three states, said an extension of the deadline to sell the bonds would be helpful.

He noted that the $8 billion Liberty bond program created after the Sept. 11, 2001, attacks to foster economic development in Manhattan has been given seven and a half years to sell the bonds. The program has received one extension and another is being sought because the authorization expired in December 2009.

By comparison, the $15.2 billion of GO Zone bonds were allocated after the act was signed into law on Dec. 2, 2005. The bonds had to be sold in five years.

“If we had that longer drawdown period, sponsors could sell bonds to get a project started and then sell the remainder of the allocation to complete it,” Landry said.

Despite problems that have prevented all the GO Zone bonds from being sold, Kennedy said there is no doubt the program has aided Louisiana’s economic recovery in the aftermath of devastating storms.

“It has funded a very diverse group of projects,” the treasurer said.

One of the largest conduit issuers of GO Zone bonds in the state is the Louisiana Public Facilities Authority, which has closed on $828.1 million for various projects, including a $100 million synthetic fuel plant, a $100 million electrical transmission restoration effort, a $35 million film studio, and a number of smaller projects such as car dealerships, office buildings, and single-family home mortgages.

The LPFA has another $100 million of unissued bonds approved by the State Bond Commission that are expected to be sold before the GO Zone program expires, said Martin Walke, vice president for economic development for the authority.

“It would be the worst sin possible to leave money on the table,” he said. “No one involved in economic development in Louisiana wants that to happen, and we’re going to great lengths to make sure it does not.”

Walke said the GO Zone bond program has been effective in rebuilding the state’s hurricane-ravaged economy and saved developers on interest costs. But the short window available to sell the bonds made it difficult for some projects to be financed.

“Tax-exempt financing lowers your interest rate by a full 2%,” he said. “Projects in some of the hardest-hit parishes may have been built if GO Zone bonds had not been available, but certainly not on this timetable.”

Walke also said many projects that received allocations from the State Bond Commission were unable to issue the bonds due to a weak national economy.

“Last year was an awful year to be trying to issue bonds,” he said. “This year is better. Not markedly better, but still better than 2009.”

There have been critics who complained about the program because large allocations have gone to oil companies and utilities. For example, $1.35 billion of Mississippi’s GO Zone allocation went to Chevron U.S.A. Inc. to finance crude oil refinery facilities in Pascagoula.

Walke acknowledged that many of Louisiana’s bonds have been allocated to large petrochemical projects in the Lake Charles and Baton Rouge areas.

“In a perfect world, there would be more manufacturing projects with lots of ­high-paying jobs, but we’re not going to be choosy,” he said. “We are very ­appreciative that Congress gave us such a valuable tool.”

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