DALLAS - Louisiana yesterday won a longer reprieve than it expected from the U.S. Treasury Department on converting its auction-rate securities for the Superdome in New Orleans.
Treasury officials notified governmental issuers 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 yesterday had planned to seek a 179-day extension.
"It's much more than what we asked for," said Whit Kling Jr., director of the bond commission. "It takes the pressure off of us."
The State Bond Commission will meet Friday to set a length of time for holding the ARS, and the governor will have to sign off on the deal, Kling said. The previous limit on holding the ARS was at 270 days, he said.
The Treasury statement came after requests from Louisiana and other issuers who have had trouble converting their debt to a more stable interest rate mode in the current tumultuous market.
"We were one of the first to ask for it," Kling said. "Because the auction-rate securities problem has not gone away, and the alternatives to it are not that attractive."
Louisiana Stadium and Exposition District purchased the ARS in April after the auctions failed.
The state currently holds $225.8 million of the auction-rate bonds, or about 95% of the outstanding bonds from $294.3 million of debt issued in 2006 by the district that oversees the Louisiana Superdome, home of the New Orleans Saints of the National Football League, and the adjacent New Orleans Arena, home of the New Orleans Hornets of the National Basketball League.
The Louisiana Legislature passed a measure in March to allow the state to purchase the bonds. The U.S. Treasury allowed the state to hold the debt for 179 days, but that time would have run out before the Bond Commission's scheduled meeting on Oct. 16.
"We can't refund, because there is no credit available," Kling said before the latest notice was issued. "Even if there was, I'm not sure the district would be able to remarket the debt."
Kling said the state has received verbal confirmation that the holding period would be extended another 179 days through a ruling by the Internal Revenue Service, but had nothing in writing.
"The extension is not the final answer, but we have to do whatever is needed to move forward," he said. "It is only a short-term solution. We still have to come up with a long-term solution."
The district sought relief when the interest rate on the debt shot up earlier this year from approximately 4% to more than 12% as a result of Financial Guaranty Insurance Co., the insurer of the bonds, losing its triple-A rating. The resetting of the interest rates from the failed auctions added $1.8 million a month to the district's debt service that had fluctuated between $300,000 and $450,000 a month.
Kling said the state has considered a reverse repurchase of the bonds, but that would be extremely costly and could involve some legal issues. If the state holds onto the bonds after the deadline, he said, the debt would lose its tax-exempt status and would have to be remarketed as taxable debt. If the debt remains in the auction rate, the interest rates would reset back to 12%.
"There are no good options," Kling said.
Freda S. Johnson, president of Government Finance Associates, Inc., the commission's financial adviser, said the Superdome district was one of many issuers facing the expiration of the federal deadline on their auction-rate debt.
"This is not unique to the Louisiana Stadium and Exposition District," she said. "A lot of issuers are in this situation.
The district issued the debt in March 2006 to provide $40 million for repairs to the stadium damaged by Hurricane Katrina in August 2005, refund the district's existing debt of approximately $200 million, and provide $25 million of working capital for the district until revenues reach pre-Katrina levels. Some $10.5 million of the proceeds repaid a 2005 note representing a loan Merrill Lynch & Co. had made to the district.
The 2006 sale included $170 million of insured tax-exempt revenue and refunding bonds, $70 million of insured taxable/tax-exempt convertible revenue and refunding bonds to facilitate additional advance refunding opportunities, and $56 million of uninsured taxable revenue and refunding bonds.
The district's credit was downgraded to Ba1 by Moody's Investors Service and to B by Standard & Poor's after the hurricane. Moody's bumped the rating up to a bare investment-grade level of Baa3 before the sale, but the district said it did not seek a new rating from Standard & Poor's because the agency probably would not have raised the bonds above junk status.
The bonds are supported through Superdome revenues and the district's 4% hotel-motel tax.