Denver Public Schools Refund $400M of Controversial COPs

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DALLAS — As part one of a two-part transaction, Denver Public Schools on Tuesday issued $400 million of certificates of participation designed to lower the cost of a controversial 2008 floating-rate deal that funded the teachers pension program.

The Series 2011B COPs were issued as fixed-rate debt maturing through 2037 and are not tax-exempt.

In Tuesday’s pricing, maturities of 2026 yielded 275 basis points over Treasuries while 2037 maturities yielded 250 basis points over.

The certificates carried an underlying rating of A-plus from Standard & Poor’s and Aa3 from Moody’s Investors ­Service.

David Suppes, chief operating officer for DPS, said Tuesday’s deal was “way oversubscribed.”

“We’re really pleased that there was significant interest in the deal,” he said. “There’s been a lot of volatility and munis have been getting a bad rap in the market lately.”

Next week, the district will offer $400 million of Series 2011A COPs in the weekly variable-rate mode. Those certificates will carry ratings of triple-A based on letters of credit from JPMorgan Chase Bank, Royal Bank of Canada, and Wells Fargo Bank.

“Standard & Poor’s joint criteria assumes the likelihood of nonpayment of debt service is reduced when two noncorrelated entities are obligated to pay,” the rating agency said.

The district’s Series 2011A and 2011B bonds will refund $750 million of Series 2008A and 2008B pension COPs issued in variable-rate mode and insured by Financial Security Assurance Inc. — now Assured Guaranty Municipal Corp. — with a standby bond purchase agreement provided by Dexia Credit Local that expires this month.

Parent company Dexia Group was the fourth-largest letter of credit provider in 2008, a record year for variable-rate debt, with volume reaching $120 billion. Since then, Dexia has left the market.

The standby bond purchase agreement with Dexia will be converted to LOCs provided by JPMorgan, Royal Bank of Canada, and Wells Fargo.

After remarketing of the COPs failed in late 2008, they were successfully remarketed in mid-January 2009. Interest costs for fiscal 2009 exceeded the budget by about $24 million.

Exiting the 2008 certificates will cost about $42 million, but Suppes said DPS also experienced savings with the 2008 deal by lowering interest cost on unfunded pension liabilities from 8.5% to an average of 6.8%.

The district entered into three separate interest-rate swaps on the COPs as the bond market was beginning to collapse in 2008.

Next week’s deal retains the swaps but shifts about $100 million from JPMorgan to Wells Fargo.

The cost of terminating the 2008 swap agreement is about $36 million and that will be covered by proceeds from Tuesday’s fixed-rate deal, Suppes said.

Assured Guaranty will provide insurance on the 2011A COPs.

The swaps will maintain the basic terms and amounts with counterparties RBC and Bank of America, with the same notional amounts of $100 million and $200 million, respectively. The notional amount of the 2008 swap with JPMorgan will be reduced to $100 million and transferred to Wells Fargo.

The district will receive 100% of the weekly London Interbank Offered Rate while paying a fixed rate of 4.94% plus the LOC and remarketing rate.

“Management lacks a policy on its level of desired variable-rate debt exposure or specific swap-minimum collateral requirements, but management indicates it is working on creating one,” Standard & Poor’s said.

The 2008 deal was designed to close a $400 million gap in the district’s pension fund for teachers.

Interest rates that were projected at 5% spiked as high as 8.59%.

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Colorado
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