Tuesday, October 18, 2005

By Tedra DeSue

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ATLANTA — Merrill Lynch & Co. yesterday released a report focusing on the challenges facing issuers along the Gulf Coast affected by hurricanes Katrina and Rita that notes at least one credit, the New Orleans School District, ran into a default situation when the insurers for some of its bonds had to make debt payments due Sept. 1.

The district, whose debt is sold by the Orleans Parish School Board, last week repaid the insurance companies for roughly $8 million in payments that had been made for it. However, its problems could be the tip of the iceberg as dozens of credits could be in similar predicaments during the coming year, Merrill Lynch analyst Kurt van Kuller said.

“The word is still out on whether other credits will be able to make their debt service payments,” he said. “Many of them have the reserves and cash on hand to make the payments, but the real crunch will be next year.”

In the case of the Orleans school board, debt service payments due last month were missed, forcing insurers of the debt — MBIA Insurance Corp., Ambac Assurance Corp. and Financial Guaranty Insurance Co. — to make the payments.

Peter Poillon, Ambac managing director of external relations, said the company had to make payments for three credits totaling $2 million, but that all had been recouped.

“We cannot comment on who the specific credits are,” Poillon said yesterday.

The Orleans school board itself was able to make the Sept. 1 scheduled payments on some of its debt without the aid of insurance, according to Dot Miller, assistant vice president at Hancock Bank, which is the district’s paying agent on a 1999 certificate deal.

Telephone calls to the school board seeking comment were not returned.

Van Kuller noted in his report that the New Orleans district is the largest issuer in the region to default on its bonds, although it subsequently cured the situation.

According to the Louisiana treasurer’s office, the next due date for the district is Dec. 1.

One observer noted that considering it took nearly 45 days for the district to make the Sept. 1 payment, it begs the question of whether it will be able to make that Dec. 1 payment. Officials are still assessing the damage to district facilities and most schools remain closed.

The school district had already been in financial trouble before Katrina hit in August. The State Bond Commission had given it approval to issue $50 million of revenue anticipation notes to help with its cash flow situation. Katrina spoiled that deal.

While the Orleans Parish School Board’s situation appears to have been the most dire, state officials recognize the concerns of market players such as van Kuller that other credits will also have trouble making their debt payments. So efforts are under way at the state level in Louisiana and Mississippi to set up debt relief plans to help the affected issuers avoid default.

Louisiana Treasurer John Neely Kennedy has twice called upon Gov. Kathleen Blanco to move forward with a plan that would allow the state to set up a pool of funds that local governments could tap to help in making debt service payments.

Originally, Kennedy pushed it as a back-up measure as officials hoped the federal government would set up such a pool. And while Kennedy expressed confidence that Congress would do so, his hopes were dashed when Treasury Secretary John Snow announced that he would not support such a pool.

“This all but eliminated any possibility that Congress would help us in this regard,” Kennedy said in a second letter outlining his plans to Blanco.

Kennedy has placed the amount of debt outstanding from local governments impacted by the hurricanes at about $9.1 billion, with $6.4 billion being insured. Kennedy said the message to the financial markets — should there be wholesale defaults — would be that Louisiana does not pay its debt.

He suggests a pool of about $200 million be set aside by the state, from which local governments could borrow as needed to pay their bond indebtedness.

“The seed money for this pool would come from a reduction in state bonded indebtedness payments by advanced refunding, or refinancing, the state’s general obligation bonds,” Kennedy said in his letter to Blanco.

Kennedy said approval of the pool could not wait until the January legislative session, and suggested it be addressed during a special session.

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