DALLAS — The Louisiana State Bond Commission gave preliminary approval Thursday to a proposal by the Louisiana Stadium and Exposition District for $450 million of fixed-rate bonds to refund outstanding debt from $294.3 million of variable-rate bonds the district issued in March 2006.
State Treasurer John Kennedy, who chairs the Bond Commission, said the refunding is the best solution to a bad financial situation.
“We don’t find ourselves in a very good position. This was a bad deal,” he said, referring to the 2006 bonds. “It’s not perfect, but if we don’t do something, it’s going to get worse.”
The state purchased $233.1 million of the district’s outstanding tax-exempt debt in 2008 when the auction-rate market failed and Financial Guaranty Insurance Co., which insured the bonds, lost its triple-A rating.
Interest on the bonds soared to 12% from 4% when the auctions failed, said commission director Whit Kling. The state purchased the bonds in April 2008 at a rate of around 2.9%. He said the bonds are currently resetting weekly at 1.25%
“At one point in 2008 we were paying debt service of $65,000 a day on the bonds,” Kling said.
Kennedy, who in 2006 opposed the Superdome bond issue, said the state is “in a situation that nobody wanted to be in.”
“Frankly, we lost our rear end on this deal,” Kennedy said.
The Internal Revenue Service agreed to allow Louisiana to hold the tax-exempt debt for three years, but the bonds will lose their tax-exempt status if not refunded by Dec. 31, 2012.
The 2006 bonds included advance refunding and new-money debt for repairs to the Mercedes-Benz Superdome in New Orleans after Hurricane Katrina in 2005. A $55.9 million taxable component provided operational capital for the district until hotel tax revenues, which supports the district’s debt, could recover to pre-storm levels.
The district is a state entity established to oversee the Mercedes-Benz Superdome and other facilities in New Orleans.
Bank of America Merrill Lynch currently holds $45 million of the taxable 2006D tranche at the London Interbank Offered Rate plus 175 basis points. The rate is set to go to Libor plus 250 basis points in July 2013. The refunding total includes a swap termination payment of $80 million to $90 million to Bank of America Merrill.
The state is currently in litigation over the Superdome issue with lead underwriter B of A Merrill, which in 2006 was operating as Merrill Lynch Capital Services Inc. The Bond Commission will meet in executive session next month to consider the lawsuit.
Bank of America will be the lead on the refunding, according to Kennedy.
“I don’t know if I should be saying this, but if we didn’t use them we would be paying a whole lot more on this refunding,” he said.
Meredith Hathorn of Foley & Judell LLP, bond counsel for the district, said the selection of Bank of America Merrill Lynch as underwriter was the result of lengthy negotiations. “The district will get a better transaction if you have them as the underwriter,” she said.
The refunding will eliminate the state’s liability on the floating-to-fixed swaps on the bonds, but does not affect a fixed-to-fixed swap.
Doug Thornton, senior vice president of SMG Services, which operates the Superdome and the New Orleans Arena for the exposition district, said the refunding would keep debt service at $26 million a year and provide more working capital for improvements at the facilities.