DALLAS - The Louisiana Bond Commission on Thursday approved a plan by East Baton Rouge Parish to refund $92.2 million of adjustable-rate revenue bonds issued in 2006 that reset from 3% to 7.5% after the bonds lost their triple-A enhancement provided by Financial Guaranty Insurance Co.
Attorney Richard Leibowitz of Breazeale, Sachse & Wilson LLP, the parish's bond counsel, said the refunding would replace the FGIC insurance policy with a letter of credit from Dexia Credit Local, the liquidity provider for the original issue in 2006.
"We discovered that simply replacing the bond insurer is not simple," he said. "The most effective way to do it is to refund the bonds."
The variable-rate plan included two swaps that provided a synthetic fixed rate some 50 basis points below the fixed-rate component of the bond issue, Leibowitz said.
"That product was very attractive and performed exactly as planned until the rating agencies downgraded FGIC," he said.
Without the credit enhancement provided by FGIC, Leibowitz said, the bonds fell below a double-A rating, which meant the bonds could not be purchased by money market funds under Security Exchange Commission rules.
"That took us out of the market we need to be in," he said. "The parish has been paying 7.5% on those bonds for the last three weeks, and that is very expensive compared to where we think the bonds should be traded."
Leibowitz said the higher rates are costing the parish an additional $100,000 in debt service every week, which he said was unacceptable.
"We're between a rock and a hard place," he told the bond commission. "Canceling the policy would cost us more than the refunding will cost us."
House Speaker Jim Tucker, R-Algiers, a member of the bond commission, said East Baton Rouge Parish should consider recouping its losses through some form of legal action against FGIC.
"You're not alone," he told Leibowitz. "A lot of other people are also getting it put to them."
The parish commission already has approved the refunding, Leibowitz said, which could happen by mid-April.
"We've turned in the documents to the rating agencies but they are covered up," he said. "There are a lot of people out there looking to refund variable-rate debt that need a ratings report."
The parish issued the $92.2 million of variable-rate bonds in May 2006 as part of $125 million of road and street improvement sales tax revenue bonds that also included $32.8 million of fixed-rate debt. The bonds are supported by a pledge of 70% of revenues from a 0.5% sales tax that was first levied in 1990.
The bonds have underlying ratings of A2 from Moody's Investors Service, A from Standard & Poor's, and A-plus from Fitch Ratings.
The Bond Commission also asked commission director Whit Kling to prepare a new plan for the state's upcoming $200 million GO bond issue that will refund bond anticipation notes issued in 2006. The current plan calls for the issuance of auction-rate bonds enhanced with swaps, but Kling was directed to develop an alternative that relies on variable-rate debt backed by a letter of credit.
In other action, the commission approved sending out requests for qualifications to select a new financial services adviser for a three-year period beginning Oct. 21, and for bond counsel on state GO bond issues.
