The Menlo Park Community Redevelopment Agency completed the restructuring of its impaired variable-rate bond portfolio Wednesday.
Remarketing rates for the agency’s variable-rate demand obligations, which reset daily, had spiked past 5% beginning in January as market participants began penalizing debt wrapped by Ambac Assurance Corp., which insured the agency’s $72.4 million tax-allocation refunding VRDO deal in 2006.
Ambac’s parent company, Ambac Financial Group Inc., on Wednesday announced a net loss of $1.66 billion in the first quarter driven by losses on subprime-related securities the insurer guarantees.
Six weeks of negotiations resulted in an agreement by the State Street Bank and Trust Co. to convert its existing liquidity facility into an irrevocable direct-pay letter of credit, and leave the Ambac insurance intact, according to Steven Gortler, vice president at Piper Jaffray & Co., the remarketing agent for the bonds. Piper Jaffray also provided a floating-to-fixed interest swap.
“The challenge in this transaction was getting Ambac and State Street to agree to terms and conditions, especially events of default and remedies” Gortler said in an e-mail. “Ambac’s position was that as long as they are performing on their bond insurance policy, they would not cede any rights or remedies to the bank other than those already granted in the existing standby bond purchase agreement. But the bank’s view was that since they are now being asked to take credit risk as well as provide liquidity support, they should be granted the same rights and remedies that LOC banks typically receive. In the interest of getting the financing restructured, everyone agreed to compromise. Ambac gave a little, State Street gave a little, and the agency gave a little.”
Following the restructuring, the remarketing rate fell to 2.10% Wednesday, according to Piper Jaffray.
“We are hopeful that within 12-18 months Ambac will recover its credit ratings and acceptance among money market fund managers so we can terminate the LOC and go back to the original structure with insurance and liquidity,” Menlo Park finance director Carol Augustine said in a statement.
“The real challenge in the current environment is to convince banks that wrapping insured bonds with an LOC is worth their while,” said Mark Curran, a Piper Jaffray managing director who was part of the negotiations. “Right now it’s a seller’s market and banks are in the driver’s seat with respect to fees, terms, and conditions and which deals they approve for credit. Other than State Street, most of the banks we approached did not immediately recognize the value of keeping the bond insurer in the deal, so there needed to be a bit of an education process. It was slow at first but more banks are starting to come around now.”
Bond counsel Russ Trice of Fulbright & Jaworski LLP also contributed to the restructuring.
