BRADENTON, Fla. — Louisiana federal Judge Kurt Engelhardt has agreed to hear oral arguments April 21 from PaineWebber Capital Services Inc. and UBS Securities LLC on their motion to dismiss a suit filed by New Orleans involving the failed remarketing of its firefighters’ pension bonds.

PaineWebber Inc. was underwriter and remarketing agent for the city’s $171 million of taxable firefighters’ pension bonds sold in 2000 as variable-rate demand obligations. It was later absorbed by UBS Securities.

In the suit, filed in July 2008, New Orleans also named Ambac Assurance Corp. and Ambac Financial Services LLC as insurer for the VRDOs. The city has claimed, among other charges, that the defendants breached their contracts with regard to the VRDOs and a related swap.

Ambac has also filed a motion to dismiss the city’s suit but the judge has not acted on that request.

“This case is about the city’s desire to undo a transaction from which it reaped enormous financial benefits for almost eight years,” PaineWebber/UBS attorneys wrote in the motion for dismissal filed last week. 

“The city did not enter these transactions blindly: it retained a roster of well-paid financial and legal advisers, including three law firms, a financial adviser, and a swap adviser,” the motion said. Those advisers, not PaineWebber/UBS, advised the city about the “risks, uncertainties, and intricate details of the various financial contracts as well as their benefits.”

The motion argues that the firms fulfilled their contractual duties and problems were caused by the downgrade of Ambac, which provided credit enhancement and interest rate savings, for the city’s obligations.

At the time the bonds were sold, the underlying rating based on the city’s credit was Baa3 by Moody’s Investors Service and BBB-minus by Standard & Poor’s. With Ambac as the insurer, the bonds were rated triple-A.

When the credit markets began to melt down in late 2007 and early 2008, and the market for auction- and variable-rate obligations froze, Ambac’s rating also began to fall. Today, Ambac is rated Caa2 by Moody’s and CC by Standard & Poor’s.

When the city’s pension bonds could not be remarketed because of the crisis, that caused the interest to rise to penalty rates and principal payments to accelerate. Some $128 million of the debt remains outstanding and is held by the liquidity provider, JPMorgan. The city has continued to make all of its debt payments.

Attorneys in the case could not be reached for comment.

When the city filed its complaint in 2008, it was paying 10.5% interest on the bonds or approximately $400,000 a month more in debt service than it paid before the remarketing failure. The penalty bank rate actually is variable and is based on whichever is higher — the federal funds rate or JPMorgan’s prime rate — plus 1%.

New Orleans also faces exposure in a related swap with PaineWebber Capital, and at times has said the cost of the swap to the city has reached over $60 million.

In its suit, New Orleans is seeking payment for the extra money it has had to pay since the bonds could not be remarketed and it wants the swap to be terminated at no expense to the city.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.