Roosevelt & Cross Inc. did not fulfill a commitment to purchase $159.7 million of revenue anticipation notes and bond anticipation notes after it was unable to underwrite them last week, according to Kenneth Vetter, executive director for the issuer that tried to sell the debt, the Erie County, N.Y., Fiscal Stability Authority.
The county, rather than the authority, will now privately place the Rans with Bank of America NA. Vetter said Roosevelt & Cross had been unable to obtain a loan to purchase the short-term paper itself after it failed to market the notes.
Roosevelt & Cross senior vice president and manager Herman Charbonneau Friday declined to answer any questions about the deal but did give a statement.
"We've been part of the municipal bond business for 62 years," Charbonneau said. "Throughout that period we've always honored all of our commitments whenever it has been in our power to do so and we will continue to adhere to that policy."
"It was really a complete shock and even in this turbulent market there were assurances and there were assurances from a senior official representing the board" of Roosevelt & Cross, Vetter said. "You don't expect this kind of thing to happen."
Roosevelt & Cross tried to market $84.7 million of bond anticipation notes and $75 million of revenue anticipation notes on Wednesday of last week and then extended it into Thursday but was unable to close the deal. Thefirm tried to sell the notes at a time when at least $8 billion in primary market municipal deals were postponed, rescheduled, or pulled, and the short-term primary market largely froze. Rates on weekly floaters last week reached 9.20% before dropping to just under 6%.
The firm had said that if it couldn't sell the notes then "they would buy them, hold them and sell them," Vetter said.
The stability authority issued a statement that it was considering litigation, presumably against the underwriter, though Vetter would not comment on the potential litigation.
A number of market participants said last week that they had not heard of another situation like this where an underwriter had tried and failed to obtain a loan to buy securities that it was unable to market. Roosevelt & Cross was senior manager on $615.4 million in notes for issuers in New York in 2007, and has senior managed more than $848.6 million in such notes so far this year, according to data from Thomson Reuters.
Following the notification by the firm that it was unable to underwrite the debt, the authority turned to county Comptroller Mark Poloncarz. Though the Bans could be delayed, the Rans couldn't, as the county needed the money to pay its workers and debt service and other costs on Oct. 1. Poloncarz had already received a commitment from Bank of America to privately place the Rans with them when the county and the authority were trying to determine who would issue the county's debt, and that commitment was still good last week.
The authority's debt sale was expected to finally end a deadlock that had gone on for more than a year between the county and authority, which acts as a control board, over debt issuance. Neither can issue debt without the other's approval.
The Erie County authority plans to hold a special meeting this morning to authorize the county comptroller to go ahead with the Ran sale to Bank of America. Poloncarz said they were getting a rate of 2.99%, a full percentage point lower than they got for a similar deal last year and that he expected to have the cash in hand later today or early tomorrow.
Poloncarz said he was not surprised that "based on what's happening with the markets, especially the municipal markets ... that the control board and the underwriter would be incapable of closing this loan. There are very few deals that are moving forward and those that are aren't getting the best rates."
The fate of the Bans was undetermined last week.
Moody's Investors Service last week rated the Rans and the Bans MIG1 reflecting the agency's "expectation of strong market access given the strength of ECFSA's credit structure as it relates to: debt service coverage, bankruptcy risks, and insulation from county fiscal stress." The same factors were cited as reflected in the authority's long-term Aa2 issuer rating.