CHICAGO - After a month of failed auctions that have cost Cleveland millions in additional interest rate costs, officials expect to enter the market early next month with nearly $440 million of variable-rate demand bonds to refinance all its outstanding auction-rate debt.
The City Council at its last meeting quickly introduced and approved legislation allowing the refinancing, and officials have since moved to put together the financial team and obtain liquidity as it waits out a mandatory 40-day referendum period that gives voters the chance to oppose the plan.
The city's outstanding auction-rate debt consists of four pieces - $281.5 million of airport revenue bonds, $108 million of stadium certificates of participation, $20.3 million of public power bonds backed by state appropriation, and $26.9 million of taxable core bonds. Cleveland carries a total of about $2.2 billion of outstanding debt.
The city has seen failed auctions in most of its series over the last month, said Elizabeth Hruby, Cleveland's debt manager. In the worst case, interest rates on the stadium COPs spiked to 12% over a two-week period after a failed auction. But in some cases, failed auctions triggered interest rates that were only around 4%, which is "not too bad," Hruby said.
In one rare case on a piece of taxable debt, a failed auction triggered an interest rate of 4.6% - actually lower than the 5.3% rate the city was paying last year for the same debt. The bond documents of the various series differ as to the maximum rate allowed.
Wachovia Securities LLC will most likely act as senior underwriter on the stadium and taxable core debt issues, while the city expects to select remaining underwriters this week. Officials are also considering refinancing roughly $59 million of 1994 pension bonds that currently carry Ambac Assurance Corp. insurance. Morgan Stanley would be the underwriter on that transaction.
Government Capital ManagementLLC and Phoenix Capital Partners are Cleveland's financial advisers. Bond counsel is Squire, Sanders & Dempsey LLP.
The city has seven swaps associated with the outstanding auction-rate debt, and opted to issue variable-rate demand bond obligations in order to avoid paying swap termination fees, Hruby said. The city has obtained letters of credit for most of the upcoming bonds.
"Fees [for letters of credit] have gone up, but we haven't done too badly so far. I've heard of some worse in terms of fees," she said.
Sketching out best- and worst-case scenarios, Hruby estimates the city could have paid anywhere from $1.4 million up to $4.9 million in interest rate costs over the month of February, but the additional costs won't impact the city's overall finances.
"It is costing us additional money, but we certainly have the money and we'll make sure it's all paid," she said. "We assume a certain higher rate so we have the budget for it."
Prior to issuing the debt, Cleveland will shift all its auction-rate debt into a seven-day cycle in order to refinance it as quickly as possible once the 40-day referendum period is over.