BRADENTON, Fla. — Alabama federal Judge Keith Watkins accepted a settlement Monday ending a two-year-old lawsuit involving swaptions between the Alabama Public School and College Authority and JPMorgan.
The APSCA paid $19 million to settle the suit.
The settlement partly reimburses the investment bank for $12.6 million in up-front payments, or premiums, that the state agency received when it entered into swaptions with JPMorgan in 2002 and an amended swaption agreement in 2003.
A swaption gives the counterparty purchasing it the option to require a bond issuer to enter into a swap at a future date. Once the swaption is invoked, the issuer typically refunds fixed-rate debt into variable-rate debt.
Gov. Bob Riley negotiated settlement of the lawsuit, according to an APSCA resolution approving the terms obtained by The Bond Buyer.
The deal comes less than a month before Riley, a Republican, leaves office because of term limits. Riley is president of the authority and one of three board members who authorized the lawsuit in October 2008 contesting the legality of the swaptions.
"The Alabama Public School and College Authority is pleased to resolve this dispute," said Bill Newton, Alabama's acting finance director who also is a member of the authority board.
"This settlement came at this time because the two parties finally negotiated a mutually agreeable resolution," he said. "The authority always acknowledged that it would repay the premiums received from JPMorgan in 2002 and 2003."
Newton said the $19 million payment permitted the authority to repay the premiums and resolve the dispute. He said the settlement would not interfere with the authority's ability to pay its budgeted obligations such as debt service.
"We'll decline to comment," JPMorgan spokesperson Jennifer Zuccarelli said Monday.
The APSCA and JPMorgan filed a joint motion to voluntarily dismiss the lawsuit and a counterclaim for more than $122 million that JPMorgan had sought. Each party agreed to pay its own legal costs.
In response to the settlement, Standard & Poor's revised its outlook to stable from negative on the AA rating it assigns to the APSCA's approximately $2.5 billion of debt outstanding.
"The stable outlook reflects Standard & Poor's view that the pledged revenue stream has historically and, based on unaudited projections, will continue to likely generate strong debt-service coverage of both annual and maximum annual debt-service requirements," said analyst Brian Marshall. "We also believe the recently executed settlement agreement between the authority and JPMorgan Chase Bank also contributes to the stability of the rating."
In late 2008, the APSCA filed a declaratory judgment asking a federal judge to rule if four swaptions it entered in 2002, and amended in 2003, were legal hedging agreements under Alabama law.
The investment bank exercised its first option on one swaption agreement in June 2008, which would have required the authority to issue variable-rate refunding bonds by Nov. 1.
In addition to citing unstable and unfavorable market conditions for refundings at that time, the APSCA's suit claimed that the swaption agreements were not proper hedging agreements because swap payments would have been front-loaded.
In court documents, JPMorgan said that the authority defaulted on the agreements when it did not begin exchanging swap payments in May 2009, which gave it the right to terminate all four swap agreements for a fee of $122 million plus interest, legal fees, and expenses.
In September 2008, about a month before the APSCA suit was filed, former state finance director Jim Main received a subpoena from the Justice Department's antitrust division ordering him to appear before a grand jury in New York and produce documents related to the swaptions.
It is not clear if the Justice Department's massive ongoing antitrust probe of the muni derivatives and guaranteed investment contract markets was a factor in APSCA's settlement with JPMorgan.
