New Jersey could be out of the auction-rate market by the end of July as officials yesterday approved remarketing $360 million of auction-rate securities, the last portion of the state's overall $3.3 billion of ARS backed by annual appropriation.

The New Jersey Economic Development Authority authorized remarketing $360 million of auction-rate bonds for light rail into fixed-rate debt or converting the securities into variable-rate mode. Combined with an upcoming $345 million New Jersey Transportation Trust Fund Authority conversion transaction that officials approved in early May, the EDA issue would remove New Jersey's remaining state-appropriation debt from the auction-rate market.

Failures in the auction-rate market have cost New Jersey roughly $1.8 million per week since mid-February in additional interest-rate costs. The TTFA deal is set to price in July, with the EDA transaction set to price around the same time, according to state Treasury spokesman Tom Vincz.

"It should be going to the market within the next month or so," he said.

The EDA sold $360 million of Series 2003 A and B auction-rate revenue bonds on behalf of the New Jersey Transit Authority. The bonds are insured by Financial Security Assurance Inc. FSA currently holds triple-A ratings with a stable outlook from all three credit agencies.

Morgan Stanley is the lead banker on the EDA transaction and current plans include remarketing the ARS into fixed-rate bonds, with the state paying a termination fee to end the two swap agreements attached to the bonds. That fee is determined based on market conditions at the time of the swap's end.

"The objective and the plan with this transaction is to replace auction-rate bonds, which are at approximately 6% interest, with 4% fixed bonds over the remaining life of the bonds to 2019," Vincz said. "And that would in essence save approximately $5 million to $7 million per year in interest costs over what we would otherwise be paying. So the swap termination in relation to where it is now in the mark to market would be paid for roughly in about a year."

The two swaps attached to the Series 2003 A and B bonds currently offer the authority a synthetic fixed rate with UBS AG and Morgan Stanley as counterparties, paying 62% of one-month of the London Interbank Offered Rate, plus 20 basis points, in exchange for a fixed rate of 3.32% and 3.546% on the Series A and B bonds, respectively, according to the official statement for the bonds. The Series A bonds have a par amount of $325 million, with the Series B bonds making up the remaining $35 million.

Due to changes in the market, state officials want to keep other options open besides remarketing the debt, including refunding the auction-rate securities into fixed-rate bonds or converting the debt into variable-rate demand bonds.

"At this time, the Office of Public Finance anticipates exiting the light-rail bonds from the auction-rate market by remarketing them as fixed-rate bonds and terminating the related swaps," according to an OPF letter sent to the EDA. "The market dynamics are changing daily, such that it is not certain that this will be the final course of action. The uncertainty in the market is the reason that authorization for several options is being requested in the resolution."

EDA's authorization also allows the state to obtain a letter of credit or a standby bond purchase agreement to provide additional liquidity, if necessary.

Of the Series 2003 A and B bonds, UBS Securities LLC is broker-dealer on Series A-1 through A-4 and the Series B bonds. Series A-1 and A-2 and Series B price every week while Series A-3 and A-4 re-set every 35 days.

Morgan Stanley is the broker-dealer on the seven-day Series A-5 bonds and Commerce Capital Markets Inc. remarkets the Series A-6 bonds every week as well.

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