DALLAS – A mistaken advance refunding of $79 million of non-callable bonds that closed Aug. 1 won't cost New Mexico any money and poses no risk to bondholders, according to the State Board of Finance.
“No holder of New Mexico general obligation bonds will be adversely affected, and there is absolutely no risk of default,” board member John Kormanik said in a statement that he asked to be included in the minutes of a Friday emergency meeting. “No new bonds will be issued and no new costs will be incurred. The board will make sure that mistakes of this magnitude do not occur again.”
The board’s financial advisor David Paul, president of the firm Fiscal Strategies Group, apologized for the mix-up and the need to schedule an emergency meeting to restructure the escrow account for a portion of the $153 million of refunding bonds that priced competitively July 18 as 2017 Series B bonds.
“Suffice to say, I speak for all the members of the financial team when I say we wish we weren’t here,” Paul said. “We all let you all down.”
Among those at the meeting in Santa Fe were co-bond counsel Jill Sweeney and Parker Schenken from Sherman & Howard, and Luis Carrasco of the Rodey Law Firm. Disclosure counsel attorneys Ken Guckenberger and Dave Caprera of Kutak Rock were also present.
Gov. Susana Martinez, a member of the board, listened to the meeting over the phone but made no comment.
Before the board could vote to restructure the escrow fund from taxable to tax-exempt investments, members had to approve a waiver exempting the bond counsel from potential conflicts of interest in order to advise the board. The waiver passed unanimously.
Paul said the escrow fund had to be restructured to tax-exempt investments to comply with expected interpretations from the Internal Revenue Service. The escrow account is currently made up of taxable Treasury debt typically used in advance refundings.
The escrow will be shifted temporarily into a municipal bond mutual fund until the board can approve likely investments in bonds from New Mexico and other states.
The bonds issued Aug. 1 refunded debt issued in 2013 and 2015. While the 2013 bonds were refundable, the 2015 bonds were not subject to early redemption, according to a notice known as a “sticker” issued a few days after the preliminary official statement was published. A staffer at the New Mexico Department of Finance discovered the sticker and told the finance team about it, according to Paul.
The 2017 bonds were issued based on the mistaken understanding that the 2015 bonds maturing after March 1, 2020 were subject to early redemption. The sticker contradicted that, meaning that all of the 2015 bonds would continue to mature serially through 2025.
That left the 2015 bonds and the 2017 advance refunding bonds both outstanding.
However, board members learned that even with the mistake, the state would still save money – possibly as much as $3.5 million – on the refunding. Without the mistaken assumption about the 2015 bonds, refunding the 2013 bonds would not have been advisable, Paul said. As it turned out, the state saved about $1.5 million in net present value on the 2013 bonds and, under a best case scenario, may save as much as $2 million on the 2015 bonds.
While that is less than the $8 million in NPV savings expected in July, it is better than nothing, Paul said.
“We would never have recommended the 2013 bond refunding if we had not sold the 2015 bonds, and therefore the savings would be zero,” Paul said.
All of the firms present at the meeting stipulated that New Mexico would face no additional fees for resolving the problem with the advance refunding. However, the state did not give up its right to indemnity for any costs or legal penalties that might occur.
Before the meeting end, board members actually gave the bond counsel and financial advisors a pat on the back for their handling of the embarrassing mistake.
“You are the epitome of how people should handle something like this,” said board member Adelmo Archuleta. “It is very important that we look at lessons learned without pointing fingers.”