BRADENTON, Fla. -Florida's Citizens Property Insurance Corp. has aggressively participated in auctions of its floating-rate debt and as of Monday had purchased about 44% of its outstanding $4.75 billion of taxable auction-rate securities.

The state-run agency, an insurer of last resort to provide Floridians with hurricane coverage, had been buying its own auction-rate securities for several weeks in an attempt to prevent failed auctions. But the highly unstable credit market finally produced Citizens first failed auction on Feb. 13, resulting in a reset at the penalty rate of 15%. Four other auctions were successful, but interest rates reset between 10% and 12%, significantly higher from when the securities were first sold.

Last week, interest rates on all of Citizens auction-rate securities were just over 3%. But it wasn't a sign that the ARS market was stabilizing.

"Citizens participated in selected auctions to reduce the interest rate to save taxpayers dollars," the agency's chief financial officer, Sharon Binnun, said on Monday.

A brief secondary-market disclosure also was filed on Monday.

The disclosure stated in part: "Citizens has been and intends to continue submitting bids to purchase in auctions with respect to the Citizens ARS ... Citizens presently intends to continue to submit hold orders in subsequent auctions with respect to Citizens ARS purchased by it as it develops a new plan of finance."

"The entire market has really fallen out from under us," said Binnun, who noted that the insurer's bond documents permit it to participate in its own auctions. "Issuers across the country are having to participate in their auctions basically to save taxpayers' dollars."

While bond documents allow Citizens to participate in its auctions, Binnun said the agency also consulted its bond and disclosure counsel before implementing the buy-back program.

Citizens bond counsel is Squire, Sanders & Dempsey LLP. Disclosure counsel is Bryant Miller Olive PA.

Because of the ARS meltdown, Citizens has seen interest rates on its debt rise faster than the income on investments. As a result, negative arbitrage soared to about $30 million a month, Citizens' financial adviser, John Forneyof Raymond James & AssociatesInc., said during a meeting of the agency's finance committee on Feb. 14.

However, while the auction market crunch has crimped finances for many issuers, Citizens is in a better position than most to deal with the crisis despite its large exposure. Because the insurer's securities were sold to provide cash on hand for liquidity in case funds were needed quickly to pay hurricane claims, Citizens has ready access to the proceeds invested in liquid securities.

The debt was sold as taxable obligations so the proceeds could be invested, and the proceeds are now being used to buy back the securities. The debt is insured by a variety of bond insurers. Citizens has no swaps currently outstanding.

"We are unique in that, unlike many issuers, we do not use the proceeds, we invest them, so for us it is not a drain on operating finances," Binnun said. "I think many believe that the auction-rate market is no longer a viable source of liquidity and the question is whether this is a temporary thing or a permanent thing."

"The auction-rate market has served us well for many years," she said, adding that the securities provided appropriate liquidity at very low costs. "But right now that market is effectively not available to us and we have a plan to completely restructure all liquidity."

Citizens will take out all, or substantially all, of the auction-rate securities and use other vehicles to provide liquidity. Earlier this month, the agency told its financial adviser to work on a plan to defease the ARS and implement a multifaceted plan to provide liquidity in advance of the upcoming hurricane season, which officially starts June 1.

Forney on Feb. 14 recommended to the agency a four-point plan to replace the securities with other forms of potential liquidity.

The initial plan under discussion includes negotiating the extension of an existing $1 billion bank line of credit Citizens has now through a group of banks led by Citiand JPMorgan. Then Citizens would solicit another consortium of banks to provide an additional $1 billion line of credit.

Citizens also is exploring the issuance of $1 billion of variable-rate demand notes insured by triple-A rated Financial Security Assurance, whose parent company, DexiaSA, would be the liquidity provider.

The agency also is considering the issuances of $2 billion to $3 billion of a short-term, taxable, or fixed-rate product.

Further details about the new liquidity plan are expected to be presented to Citizens finance committee on March 12 and to its board of governors on March 13.

The underlying ratings for Citizens' various bond issues are in the single-A category with a stable outlook.


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