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Louisiana Refunds $303 Million to Avoid Swap Fees

DALLAS — Louisiana will refund $303 million of gasoline and fuels tax revenue bonds to avoid $110 million of swap fees on the variable-rate debt with Thursday’s negotiated transaction.

Without the refunding, the state would face a June 1 hard call on the tranches of second-lien bonds issued in 2009 and 2010 to finance projects in the constitutionally mandated Transportation Infrastructure Model for Economic Development program.

The second-lien revenue bonds are rated AA by Standard & Poor’s, AA-minus by Fitch Ratings and Aa2 by Moody’s Investors Service.

JPMorgan is underwriter for the issue.

Foley & Judell LLP is bond counsel. Lamont Financial Services Corp. is financial advisor to the state.

Louisiana’s outstanding gasoline and fuels-tax revenue bonds include $1.85 billion of outstanding first-lien bonds and $880 million of second-lien debt.

No additional senior-lien debt can be issued for the transportation effort, and second-lien issues are limited to refundings that provide debt-service savings in every year.

About 55% of the second-lien debt was issued in a variable-rate mode and synthetically fixed through floating-to-fixed-rate swaps.

The transaction will extend but not take out the interest rate swaps on the two tranches being refunded this week. The refunding will push the mandatory tenders to 2017 on the $200 million of 2009 bonds and to 2018 on the $103 million of 2010 bonds.

The swaps were based on a combination of SIFMA and Libor indexes, but the refunding bonds will be strictly tied to Libor, said Whit Kling, director of the Louisiana State Bond Commission. It gave final approval to the refunding at a special session on May 7. Amending the index connection will eliminate any basis risk, he said. “We’re rolling over the debt but we’re also changing the index,” Kling said. “We had the bonds in one index and the swaps in another.”

Having a single index will make it easier to determine the potential liability from the swaps, he added. “We’ll know exactly what the costs will be with the refunding,” Kling said at a special session of the Bond Commission this month. “It will be the fixed rate plus the spread on the index.”

The state issued five tranches of second-lien gasoline and fuels-tax revenue bonds in 2009, each of which had two associated swap agreements, Kling said.

One tranche has a hard put on Nov. 1, he said, and will be refunded if it becomes economically feasible before the call date. The state will attempt to take out the swap agreements with the refunding of the bonds callable in November.

Voters in 1990 approved a constitutional amendment increased the state gasoline tax to 20 cents per gallon from 16 cents, and decided the 4 cents per gallon increase to the $5.2 billion TIMED program. Senior-lien debt is supported by the dedicated tax, with second-lien debt drawing its support from the other 16 cents.

The taxes currently generate $575 million a year for Louisiana’s transportation trust fund.

The Department of Transportation and Development has completed 11 of the 16 projects in the TIMED effort, with three under way. A total of $4.86 billion has been spent on TIMED.

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