New Jersey has $3.4 billion of auction-rate debt that state Treasury officials are considering whether to convert or refinance into variable- or fixed-rate mode as $493 million of the state's auction-rate bonds failed to gain sufficient buyers over the past week.
Failed auctions have cost the Garden State an additional $2 million in interest payments so far. Helping to absorb that added cost is a roughly $5 million cushion from swap agreements that proved positive for New Jersey during the first half of fiscal 2008, which began July 1. But the $5 million will only go so far and the Treasury Department is evaluating different strategies for changing the state's existing auction-rate bonds into other forms of debt, according to Nancy Feldman, director of public finance.
"Our portfolio is quite large and we may have to use multiple options of various forms of conversions to variable rate whether that's standby bond purchase agreements, or letters of credit, adjusting to longer put-type modes or conversions to fixed," Feldman said. "We're looking at all of them and may actually use some portion of all of them."
Auction-rate deals fail when the long-term bonds do not attract enough buyers to match the number of sellers trying to get out of the investments. It leaves issuers to pay a higher penalty interest rate to the investors holding the bonds. Historically, the broker-dealers on such transactions have purchased such debt, yet many banks are experiencing liquidity issues due to the fall out of the subprime market and are not willing to put up the capital to buy the remaining bonds.
In response to the failed auctions, issuers are now searching for ways to escape the auction-rate market by converting auction-rate debt into variable rate or refinancing the bonds into a fixed-rate mode.
New Jersey's $3.4 billion represents state-backed debt sold by various authorities, including the New Jersey Economic Development Authority, the New Jersey Transportation Trust Fund Authority, the New Jersey Building Authority and the New Jersey Sports and Exposition Authority. Feldman said she and her staff will review different options before bringing proposals before the various authority's boards to receive final authorization, a necessary step before officials could convert or refinance the auction-rate bonds.
"We are expecting to be receiving proposals from bank providers and as soon as we have those collected and collated and see who's offering what at what price," Feldman said. "We can start moving forward with requesting approvals from the various authorities."
How issuers will disclose auction results remains to be seen. Wisconsin posts the results of its auctions along with all of its other financial disclosures on its Web site. Feldman said New Jersey has yet to release that information online.
"We have not used our Web site for that level of disclosure and while ideally that would be perfect, this is not the time for us to start because it takes a lot of work to do a disclosure Web site of that sort," she said.
In looking at New Jersey's failed auctions, Series 2004 H3 and H4 NJEDA school facilities construction 7-day bonds, each for $73 million, reset at 7.011% on Feb. 14 and 3.7% on Feb. 7. The bonds are insured by XL Capital Assurance Inc. and have a maximum reset rate of the lessor of 14% or 225% of the London Interbank Offered Rate. NJEDA school facilities bonds Series 2004 J2 for $82.8 million reset at 6.242% on Feb. 13, up from 3.8%. The bonds are insured by Financial Guaranty Insurance Co. NJEDA Series 2005 M2 for $90.2 million reset at 5.462%, up from 3.55%. CIFG Inc. insures the debt.
Attached to the NJEDA school facilities bonds are various swap agreements where the authority pays a fixed interest rate ranging from 4.062% to 4.407%, depending on the swap, while receiving from counterparties Bank of America NA, Goldman Sachs & Co., UBS AG, and Wachovia Bank NA 75% of one-month of Libor.
The state had two NJEDA light rail series that failed at auction. Series 2003 A5 for $52.2 million reset at 5.453% on Feb. 14, up from 3.1% and Series 2003 B for $35 million reset at 5.462% on Feb. 13, up from 2.9%. The bonds are insured by Financial Security Assurance and the maximum reset is 12%. Attached to the light rail bonds are swap agreements where the authority pays a fixed rate of 3.32% or 3.54% and Morgan Stanley and UBS AG pay 62% of one month of Libor plus 20 basis points .
In addition to the NJEDA bonds, NJBA Series 2003 A3 bonds for $36.3 million reset at 6.232% on Feb. 14, up from 3.5%. The bonds are insured by XLCA. The NJBA has six different swap agreements where the authority pays a fixed rate of 3.64% and counterparties including Citi, Goldman Sachs, and Morgan Stanley pay 62% of Libor.