DALLAS - The Louisiana State Bond Commission gave its approval on Friday to the state's continued holding of auction-rate bonds issued by the Louisiana Stadium and Exposition District that the state purchased in April after the auctions failed.
Louisiana had faced a deadline of Oct. 10 to remarket the bonds in the auction-rate mode but U.S. Treasury officials notified governmental issuers on Wednesday that they can purchase and hold auction-rate securities, variable-rate demand bonds with seven-day put options, and tax-exempt commercial paper until Dec. 31, 2009.
The state currently holds $225.8 million of the stadium district's debt, or about 95% of the outstanding bonds from $294.3 million of ARS issued in 2006 by the district that oversees the Louisiana Superdome in New Orleans.
The interest rate on the auction-rate debt issued by the stadium district reset to 12% in spring 2008 when the insurer of the bonds, Financial Guaranty Insurance Co., lost its triple-A rating. That increased the district's debt service, which was approximately $450,000 a month, by an additional $1.8 million.
Louisiana is currently receiving 2.9% on the stadium district's debt that it holds, said Whit Kling Jr., director of the State Bond Commission.
"This is a continuation of a structure that we all agreed in 2006 was not the best structure for the district, but it was what it was," Kling said. "Now we are faced with several options, none of which are very good."
Kling said several alternatives for dealing with the debt had been considered before the Treasury Department said the bonds could be held until the end of 2009, but none was viable.
"What other options are on the table?" asked Rep. Hunter Greene, R-Baton Rouge, a member of the Bond Commission.
"There are none," Kling said. "This option is the table."
The 2.9% interest rate that Louisiana offered when it bought the bonds was a safe harbor rate that reflected the average interest rate at the time the bonds were acquired by the state as an investment. Meredith Hathorn of Foley & Judell LLP, the bond attorney for the Superdome district, said that process was required to ensure the validity of the auction.
"The auction has to be fair," she said. "The state could not manipulate the market by offering a rate that was below the market rate."
State Treasurer John Kennedy, chairman of the Bond Commission, urged the stadium district to sue the bond insurer. The district paid an insurance premium on the bonds of $13 million, a charge that Kennedy called "unconscionable" when the bonds were sold in 2006.
"Why is the district not suing the bond insurer?" he asked of Hathorn. "How much longer will the district be exploited?"
Hathorn said every option was being explored, and said she would provide a report on that aspect of the situation to the commission within 30 days.