The Dormitory Authority of the State of New York yesterday decided to replace one Merrill Lynch & Co. subsidiary with a higher-rated subsidiary as a counterparty to two swaps with a notional value of about $320 million.
DASNY’s board approved the change to the Switzerland-based Merrill Lynch Derivative Products AG from Merrill Lynch Capital Services Inc. at its monthly board meeting.
By statute, a counterparty to a DASNY swap has to have at least one double-A rating. When Moody’s Investors Service downgraded the parent company in October to A1, MLCS lost its double A. This has meant that when the mark-to-market value of the swap is in DASNY’s favor that Merrill has to post collateral.
“If it’s positive to us they have to post collateral,” said Mark Rufer, DASNY senior director for public finance. “As much as it sounds easy, it’s very difficult and time-consuming for us as well as them.”
MLCS has only had to post collateral once, about $200,000 dollars, he said. Rufer said DASNY initiated the change: “We went to Merrill and said ‘do you guys have a triple-A sub?’ and they said ‘do you want to be in our triple-A sub?”
Orrick, Herrington & Sutcliffe LLP is swap counsel. The swaps were done in conjunction with refundings, Rufer said. One was on City University of New York System consolidated revenue bonds with a swap term to 2031 and a notional value of $203.2 million, according to division of budget documents. The other was for mental health services revenue bonds, Series 2003F-2 with a term ending in 2021 and a notional value of $119.5 million, according to division of budget documents.
Merrill Lynch spokeswoman Danielle Robinson declined to comment.
DASNY isn’t the only state authority looking to change from MLCS as a swap counterparty. The New York State Thruway Authority, which has a notional amount of $53 million in a swap with a term ending in 2021, plans to change to the Swiss subsidiary, Thruway Authority chief financial officer John Bryan said in an e-mail yesterday. The Thruway board will consider the change at it February board meeting, Bryan said.
Standard & Poor’s director Peter Block said he wasn’t surprised that these entities were looking to change counterparties.
“It’s natural for government to want to do that if they can because it provides better counterparty protection, this is the first I’ve heard of it,” he said. “It remains to be seen whether or not it becomes a trend.”
In other business yesterday, DASNY also approved a change in how it will deal with highly rated educational and non-healthcare 501(c)(3) institutions. By amending its guidelines on security for conduit financings for independent institutions, DASNY effectively created a two-tier system that it believes sets less burdensome requirements for institutions rated Aa3/AA-minus or greater.
The new guidelines mean that such institutions will not have to hire a qualified management consultant for their project but gives DASNY the option of requiring a consultant if the institution’s rating drops below A1/A-plus and mandates the hiring of management consultant if the institution’s rating drops below A2/A. The change also lowers the rating level below which institutions would be required to have credit enhancement and a debt service reserve fund for their deals to institutions rated below A3/A-minus.
The change was worked out with guidance from Public Financial Management Inc.
DASNY also approved $908 million of bond transactions for four separate deals. The largest was for Rockefeller University, which, with a AAA rating issued from Standard & Poor’s yesterday, will be the first to take advantage of the new rules for highly rated institutions.
The New York City center for research and education in biomedical sciences plans to use the proceeds of $455 million of bonds for building renovations and reconfigurations, as well as to refund $84 million of bonds issued in 1998 and $62 million of bonds issued in 2002. The new bonds will have maturities of up to 40 years.
Morgan Stanley is lead underwriter and Nixon Peabody LLP is bond counsel.
The board also approved $259.3 million of 30-year bonds on behalf of the Orange Regional Medical Center which plans to construct a new 374-bed replacement hospital facility as mandated by the state’s Commission on Health Care Facilities in the 21st Century. The medical center currently has two facilities that will both close.
Fordham University in New York City plans to use the proceeds of $119.1 million of bonds with maturities up to 31 years to construct a new dorm and renovate its existing campuses.
DASNY also approved $75 million of personal income tax bonds to fund New York State health care grants.