DALLAS - The Louisiana State Bond Commission will consider increasing a pending $485 million road bond issue by $200 million to pay a hefty but fluctuating swap termination fee when it meets Thursday morning.
Prompt action is needed to meet the deadline for publication of intent to issue the debt because the bonds must be sold by May 1, said Whit Kling Jr., director of the Bond Commission.
"It's an open-ended notice because at this time we don't know the exact structure of the deal," he said. "No decision has been made whatsoever in the negotiations with the swap counterparties, but I added the $200 million for the swap fee in case we have to pay up to that amount."
Kling said the final structure of the bond issue should be available by the commission's March meeting, but that would be too late for the publication of the sale.
"We'll do what we have to do, but we don't know what that is now," he said.
The state was scheduled to issue $485 million of the gasoline and fuels tax bonds in late 2008, but postponed the sale because of significant penalties associated with the swap termination agreement.
The bonds must be sold soon or the state's $5.2 billion Transportation Infrastructure Model for Economic Development road and bridge program - known as TIMED - will run out of funds and be forced to stop work on several projects.
The forward-purchase delivery contract for the variable-rate debt, with Morgan Keegan & Co. and Citi as underwriters, was approved by the commission in 2006
Swap counterparties complied with a request by the commission in October to extend the agreements until May 1 in anticipation that the market would improve so that the state could issue the bonds at an acceptable rate. Negotiations between state officials and the counterparties are continuing in an effort to lower the swap termination fee.
Counterparties include Morgan Keegan Financial Products with 50% of the swap, Merrill Lynch Capital Services with 25%, and Citibank NA and JPMorgan Chase Bank with 12.5% of the swap each. There are a total of eight swap agreements with the four parties.
The forward floating to fixed interest-rate swap agreement allowed Louisiana to lock in a rate of 3.602% for the gasoline and fuels tax revenue bonds. The rate was 110 basis points lower than the 4.7569% true interest cost for the state's November 2006 $1.1 billion TIMED bond sale.
"The state's intention was to convert the variable-rate debt into fixed-rate debt by agreeing to pay 3.602% and get 75% of [the London Interbank Offered Rate]," Kling said. "That should have washed out to be about the same. But we did not anticipate the big disparity between the taxable and non-taxable indexes."
He said the termination fee went as high as $239 million in late 2008, but has since stabilized at approximately $140 million.
"The termination fee was $191 million on Jan. 1, but today it was $138 million," Kling said on Friday. "It's been relatively stable for the past three to four weeks."
Bonds for the TIMED program are supported by four cents of the state's 38.4 cents per gallon gasoline tax. The bonds have underlying ratings of Aa3 from Moody's Investors Service, AA-minus from Standard & Poor's, and A-plus from Fitch Ratings.
Louisiana is scheduled to issue another $500 million of TIMED bonds before the legislative deadline of Jan. 1, 2010.
"There are two problems with that plan," Kling said. "First, the dedicated tax won't support all the bonds remaining to be sold. Second, even if all the bonds are sold, the proceeds won't be sufficient to complete the scheduled work."