BRADENTON, Fla. - Miami-Dade County yesterday priced $68.3 million of new water and sewer system revenue bonds with the proceeds going toward paying the bulk of a $76.4 million termination payment for a swap the county entered into in 1994.
The $68.3 million Series 2008A bonds and funds in reserve will be used to make the large termination payment, said Miami-Dade finance director Rachel Baum.
In a separate series sold yesterday, the county priced approximately $400 million of fixed-rate water and sewer system revenue refunding bonds, Series 2008B. The proceeds, along with other funds, will be used to refund $415.2 million of outstanding Series 1994 water and sewer revenue bonds, which represents the current notional amount of debt under the swap.
Bonds from both series mature from 2008 through 2022. Details on the pricing were not available at press time yesterday.
The bonds are insured by Financial Security Assurance Inc. They were rated A-plus by Fitch Ratings and Standard & Poor's, and A1 by Moody's Investors Service.
"I think you really have to take into consideration that this was a 1994 swap, and one of the very earliest swaps that was done," Baum said about the size of the swap termination payment.
The swap covered a large notional amount, about $440 million originally, and was negotiated using standard documents in effect at the time that are now obsolete, she noted.
Under the swap, the county paid AIG Financial Products Corp. a fixed rate of 5.28%, plus 50 basis points for liquidity, while AIG paid the county the actual variable rate due on the bonds, according to Baum . "It was still better than what we would have gotten in the fixed market in 1994, but not better than today," she said.
The county saved approximately $12 million over the life of the swap, according to a July 1 memorandum by county manager George Burgess, which was submitted to county commissioners who authorized yesterday's sale.
The 1994 swap and the bonds were insured by Financial Guaranty Insurance Co., a formerly triple-A monoline insurer that now carries junk-bond ratings.
"When FGIC was having problems, the bonds could not be remarketed. So they became bank bonds and we were paying so much money," Baum said. "It was costing us an additional $350,000 a week."
As a result of FGIC's downgrade, AIG had the right to change the swap to an alternative floating rate, so the swap was no longer based on the actual bond rate. In this swap, AIG elected the alternative floating rate that was 67% of one month of the London Interbank Offered Rate, said Peter Shapiro, of Swap Financial Group, who as the county's swap adviser negotiated the termination.
The negotiation with AIG was to try to find something of a more beneficial termination cost for Miami-Dade, he said. AIG had hedges on the other side that were moving in the exact opposite direction, so whatever they made from Miami-Dade they were losing on the other side, he said. If interest rates dropped, the Miami-Dade portion was in the money to them, but their hedge was out of the money in approximately an equal amount, he said.
When this swap was entered into in 1994 the 10-year average Treasury was 7.07%. Now the 10-year Treasury is at about 3.80%. Miami-Dade owed AIG money to break the swap and AIG, having an offsetting swap owed money to break that hedge, he said. If interest rates were higher, AIG would have had to pay Miami-Dade.
Interest rates on the bonds being refunded rose from 5.28% to approximately 10%. From February though June, the county paid an additional $6.6 million in interest costs, Burgess's memo said.
"It was a difficult transaction to get out of because of all the moving parts," Baum said. "We started negotiating this in February."
The new deal also took a little longer to prepare because the county initially planned to call the 1994 bonds and issue the 2008 bonds in a variable-rate mode, while restructuring the swap.
Then concern arose over continuing the county's exposure to variable-rate risk.
Burgess's memo said the deal also was restructured, "due to the continuing interest-rate exposure in the variable-rate market and the continued uncertainty and over-saturation of the limited bond insurer credit, some money market funds are nearing capacity to continue to purchase variable rate bonds backed by the same insurer."
The entire deal was restructured to eliminate the swap, issue fixed-rate debt, and lock in long-term costs, Baum said.
RBC Capital Markets was the book-runner on yesterday's sale. Others in the syndicate were Butler Wick & Co., Citi, Estrada Hinojosa & Co., Jackson Securities LLC, Lehman Brothers, Loop Capital Markets LLC, Morgan Keegan & Co., M.R. Beal & Co.,Raymond James & Associates Inc.,Rice Financial Products Co., Samuel Ramirez & Co., Siebert Brandford Shank & Co., and Wachovia Bank NA.
Public Resources Advisory Group was the financial adviser. Squire, Sanders & Dempsey LLP and KnoxSeaton were bond counsel. Hogan & Hartson LLP, McGhee & Associates LLC, and Jose A. Villalobos were disclosure counsel. GrayRobinson PA was underwriters' counsel.