BRADENTON, Fla. - When JPMorgan Chase refused to renew a standby bond purchase agreement that expired Sept. 29 for more than 90 days, Miami-Dade County was forced to seek a substitute provider for nearly $300 million of variable-rate demand water and sewer bonds issued in 2005.
There were no takers.
And while there have been some difficulties remarketing the bonds because of current conditions, county finance director Rachel Baum said the debt has successfully been remarketed in the weekly mode by RBC Capital Markets.
JPMorgan issued the initial agreement on the water and sewer bonds for three years at a cost of 10 basis points.
"Usually, when you have a letter of credit on this type of transaction it gets renewed," Baum said. "Usually it's a routine type of thing but when we wanted to extend it, they would only extend it for 90 days and they said they wouldn't renew it past that."
The 90-day extension, which expires Dec. 28, will cost the county 80 basis points, or $597,500. Under the previous lower rate it would cost $74,700.
According to county documents regarding the transaction, JPMorgan told the county that due to the current lack of liquidity in the marketplace, it was reducing its exposure in the market for providing liquidity.
JPMorgan declined to comment for this story, said company spokesman Brian Marchiony.
JPMorgan Chase was the second-largest letter of credit and standby bond purchase agreement provider in the first nine months of this year, backing $5.8 billion of deals with LOCs and $5.3 billion with SBPAs, according to the latest league tables from Thomson Reuters last week.
However, the credit crisis has undermined the variable-rate market, forcing many issuers to tap lines of credit at a time when banks face funding crises of their own. The banks now hold much of the debt, which cannot be remarketed.
In a report to investors Oct. 15, JPMorgan reported third-quarter 2008 net income of $527 million, compared with net income of $3.4 billion in the third quarter of 2007.
Chief executive officer Jamie Dimon said the sharp decline was driven by "markdowns on mortgage trading positions and leveraged loans, and higher credit costs due to continued deterioration in our home-lending portfolio."
"Given the uncertainty in the capital markets, housing sector and economy overall, it is reasonable to expect reduced earnings for our firm over the next few quarters," Dimon added.
JPMorgan's senior unsecured ratings are Aa2 from Moody's Investors Service, and AA-minus from Fitch Ratings and Standard & Poor's. Moody's and Standard & Poor's have placed a negative outlook on the company's ratings.
Meanwhile, the inability of Miami-Dade to find a liquidity provider has forced the county to mount a three-pronged attack to deal with the outstanding water and sewer debt.
The county is preparing to convert the bonds to another interest-rate mode. If that doesn't work, it will consider refunding the bonds. If the market remains too volatile to convert or refund the bonds by the time the SBPA expires in December, the county has a back-up plan.
"The county would step and buy those bonds and hold them as our own investment for maybe up to six months, and then issue them to the public as a refunding," Baum said. "The reason for that is so the market will stabilize and we could issue them at a reasonable price."
Last week's rally in the bond market, however, was encouraging news to Baum, who heard institutional buyers were returning to the market. "We may be able to issue in the fixed-rate market," she said.
If the county takes that course, it will be required to terminate a swap. Although the final termination payment is subject to negotiation, it recently was calculated at about $42 million, Baum said.