New Jersey will enter the market in the next two weeks with roughly $1.7 billion of fixed- and variable-rate debt to help the state restructure its auction-rate securities and rein in soaring interest costs.
The Garden State has $3.4 billion of state-backed auction-rate debt issued by three different agencies - the New Jersey Economic Development Authority, the New Jersey Transportation Trust Fund Authority, and the New Jersey Sports & Exposition Authority. Since the auction-rate market began to fail in early February, the state has been forced to pay an estimated $1.8 million per week, on average, in additional interest costs on the auction-rate securities, according to a Senate Budget and Appropriations Committee budget hearing on Monday.
Senators addressed the issue of rising interest costs and cited the $1.8 million per-week average increase that the Treasury Department submitted to the committee before the hearing. In response, Nancy Feldman, director of public finance, said the state, within the next few weeks, will no longer carry any auction-rate debt and that the market has calmed down a bit since the Dutch auction began to fail in early February.
"The interest expense is starting to come down as the market now has seen we are refinancing and remarketing the bonds," Feldman testified before the committee. "Our auctions are clearing and our overall interest rates on those auctions have come down between 30 and 100 basis points, which is between .3% and 1%, just in the last 30 days. But it takes time for that to work its way through each of the auction transactions."
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 interest-rate penalty 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 fallout from the troubled subprime mortgage market and are not willing to put up the capital to buy the remaining bonds.
To get out of the auction-rate mess, New Jersey will sell a combined $1.7 billion of debt within the next two weeks to refinance $543.6 million of NJEDA auction-rate securities into fixed-rate bonds and convert another $1.08 billion of NJEDA auction-rate bonds into variable-rate mode.
"We'll be pricing another $1.7 billion over the next 10 days to begin a major portion of the process of working out of the auction market," Feldman said to the committee on Monday.
The $1.7 billion includes fixed-rate Series 2008W for $543.6 million and variable-rate Series 2008V for $1.08 billion. UBS Securities LLC will price the Series W bonds. Bond counsel is Wolff & Samson PC and P.G. Corbin & Co. is the financial adviser for the transaction, according to the preliminary official statement for the Series W bonds. Treasury spokesman Tom Vincz said, ideally, officials would like to issue the Series W bonds and the Series V bonds at the same time.
"The emphasis is trying to put together one deal between these two sets of series," Vincz said in a phone interview. "We are still in the formation stage of that second piece, but once we have all of our information together and we conclude negotiations with banks and letters of credits, which would be applicable in the variable-rate deal, we will be bringing these to market as well."
While the fixed-rate Series W bonds will not be insured, according to Vincz, the larger variable-rate offering will have a letter of credit attached to the debt. Fitch Ratings and Moody's Investors Service rate the Series W bonds A-plus and A1, respectively. Standard & Poor's rates the deal AA-minus.
The Series W bonds will comprise of serials maturing through 2020 and together with the Series V bonds will refinance or convert outstanding auction-rate debt sold through the NJEDA, including Series 2004H-1 through H-4 bonds for $300 million, Series 2004J-1 through J-3 bonds for $260.5 million, 2005 Series M-1 through M-6 bonds for $500 million, 2005 Series Q-3 through Q-8 bonds for $370 million, and Series 2007 T-2, T-4, and T-6 bonds for $235.2 million.
CIFG Assurance North America Inc. insures Series H-1, H-2, M-1, M-2, Q-7, and Q-8. Ambac Assurance Corp. insures Series M-3 through M-6, Q-3, Q-4, and the three T Series. Financial Guaranty Insurance Co. insures Series J-1 through J-3, Q-5, and Q-6. XL Capital Assurance Inc. insures Series H-3 and H-4.
There are several swaps attached to the bonds. For the Series J bonds, the authority has two swap agreements in which the NJEDA pays a fixed rate of 4.063% and receives 75% of the one month London Interbank Offered Rate from UBS and Wachovia Bank NA.
The two derivatives attached to the Series M bonds require the authority to pay a fixed rate of 4.176% and receive 75% of one month Libor from UBS and Wachovia. The Series Q bonds also have two swap agreements, with the NJEDA paying a fixed rate of 4.296% and receiving 75% of one month Libor from Wachovia and Goldman, Sachs & Co.
