CHICAGO - The Kansas City, Mo., treasurer started out the fiscal year in May with a slate of more than $800 million worth of new-money and restructuring bond sales. Six months later more than half remain unsold, forcing officials to tinker with the original structures in order to enter a more complicated market.

The city is reconsidering its plans on a stalled $175 million refunding of its KC Live entertainment district revenue bonds as well as a delayed $200 million new-money and refunding water revenue issue and three tax-increment finance district restructurings. Officials are also considering their options for resolving an outstanding swap with Lehman Brothers involving $47 million of the KC Live bonds, according to Treasurer Randall Landes.

"It's definitely a challenging time to be in charge of the city's debt portfolio. It's just not as simple as putting your team together and entering the market anymore," he said yesterday. "We are trying to find a balance in this market so we can move forward with what we need to do."

The KC Live deal is one of three insured variable-rate offerings Landes' office began working on restructuring earlier this year because of higher rates and failed remarketings following the downgrades of Ambac Assurance Corp.

The city sold the bonds to help finance a new arena, an expansion of its convention center, and public improvements for the KC Live entertainment district that all were part of a massive rejuvenation of downtown. The city was able to complete the restructuring of its $213 million of arena bonds and $100 million of convention bonds over the summer.

The KC Live deal was next up, but is now on hold after the financial crisis spread to European banks and rating agencies downgraded the short-term ratings earlier this month of German-based Depfa Bank PLC, which was to provide a letter of credit for the refunding issue. Oppenheimer & Co. and Stern Brothers are the underwriters with First Southwest Co. and Valdes & Moreno as financial advisers and Kutak Rock and the Hardwick Law Firm LLC as co-bond counsel.

"The solution is now another problem," Landes commented.

Kansas City may seek a new LOC provider but is also considering issuing fixed-rate bonds. Officials hope to complete the deal in the current fiscal year because of increased interest rates and the accelerated repayment that would eventually be triggered as many of the bonds are currently held by the bank liquidity provider.

Further complicating that transaction is the swap on $47 million with counterparty Lehman Brothers Special Financing Inc. While the Lehman holding company filed for bankruptcy last month, the LBSF arm did not file until Oct. 3. The counterparty has since withheld any payment it owed to the city, prompting its default on the swap. Kansas City has also now withheld any payment it would have owed this month.

Under terms of the swap, the city pays a fixed rate of 3.287% and receives 65% of the London Interbank Offered Rate. The City Council last week approved a measure authorizing the city to terminate the swap or enter a new one. According to recent analysis, termination costs have ranged between $900,000 and $2 million.

If the city opts to restructure the KC Live bonds in a fixed-rate mode, it would include the termination payment in the deal. However, the city also is looking at seeking new counterparties and building that payment into the new contract, Landes said.

Officials opted for a floating rate initially on the projects - which are backed by appropriation pledges - because it provided flexibility, as the final costs of the projects were determined and allowed the city to capture the benefits of the lower rates on the short end of the yield curve, at least until earlier this year. Once the three deals are completed, Kansas City's debt portfolio will include 79% at a fixed rate, 5% synthetically fixed, and 16% unhedged variable rate, compared to 64%, 16%, and 20%, respectively.

The city also now is revising its fixed-rate $200 million water revenue bond issue that was originally planned for September, but was delayed due to market turmoil. The original deal included a mix of about $69 million of new money for pending projects, with the rest made up of current and advance refunding bonds.

The rising interest rates forced the city to shelve the deal because the refunding piece would no longer achieve savings. Merrill Lynch & Co. was selected as the senior manager on the deal. Public Financial Management Inc. and TKG & Associates are financial advisers, with Gilmore & Bell and the Martinez Law Firm serving as bond counsel. Kansas City currently has voter authorization to issue $250 million of bonds for clean water projects and another $250 million for sewer projects.

"We are now rethinking that deal and what amount of new money is needed," Landes said.

There's a catch, however, in that separating out the new money is not so simple. The refunding piece was to pave the way for the city to establish a new, more modern master bond ordinance for the water revenue bond program. The plan was to overhaul the current program with the adoption of set fiscal policies, such as the maintenance of revenues at a certain level of days cash on hand

If Kansas City does not refund the outstanding debt, it can't simply shift to the new master bond ordinance for the new money. Instead, officials will have to issue under the existing ordinance, which requires new coverage calculations and other technical adjustments. The city also had presented the deal to rating agencies under the revised master program requirements. Berkshire Hathaway Assurance Corp. also was set to insure the original issue, so the city would have to present the company with any revisions.

Landes said the city needs some new money for water projects so the pressure is on to enter the market, but it does have at least another six months until the close of the current fiscal year on April 30. Officials are also planning a sewer revenue bond issue of around $80 million to raise new money for projects by the end of the fiscal year and are looking at a $30 million new-money general obligation sale.

Fitch Ratings assigns a AAA rating to Kansas City's $308 million of outstanding GOs and a AA to its $1.2 billion of special obligation bonds backed by an appropriation or lease. Standard & Poor's rates the debt AA and AA-minus, respectively, while Moody's Investors Service assigns a Aa3, and A2. Fitch and Moody's both assign the credits a negative outlook.

The city is also working on three tax increment financing restructurings totaling $37 million. Two of the variable-rate TIF transactions carried MBIA Insurance Corp. backing and one carried Ambac insurance. City officials are looking at possibly using fixed-rate structures or seeking letter of credit providers.

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