The New York State Thruway Authority plans to refund $521.7 million of auction-rate securities this week with a retail order period beginning tomorrow and institutional pricing Thursday. The refunding will further reduce the state's outstanding ARS to $600 million.

The state had $4 billion of ARS outstanding in February 2008 when the auction-rate market seized up. The authority first sold $530.8 million of the ARS in 2003 as local highway and bridge service contract bonds, which are backed by state appropriation.

Citi will lead manage the sale of the bonds that will be issued as serials with maturities from 2011 to 2021. First Southwest Co. is financial adviser and Hawkins Delafield & Wood LLP is bond counsel.

Standard & Poor's rates the bonds double-A and Fitch Ratings rates them A-minus.

Though auctions of Thruway ARS have regularly failed in recent months, the maximum interest rate, which is derived from commercial paper rates, has tended to be below 1% in 2009.

State Division of Budget spokesman Matthew Anderson said in an e-mail that the state was pricing the refunding bonds now to take advantage of historically low interest rates on short-term debt.

Interest rates have fallen over the past year. The yield on one-year double-A rated general obligation debt had fallen to 0.42% last week from 2.16% a year earlier, according to the Municipal Market Data yield curve scale. Similarly, the yield in 12 years on double-A GO paper had fallen to 2.98% from 4.59% in the same period.

In addition to taking out the ARS, the refunding will pay for the termination of swaps with seven counterparties. Anderson said information was unavailable yesterday as to how much the termination fees would be.

The Thruway Authority already paid $2 million to terminate a swap with the bankrupt Lehman Brothers Derivative Products Inc. in September 2008. At the end of July, the mark to market value of the swaps was $45 million negative to the state.

The swaps have been a money loser to New York. The authority agreed to pay a fixed rate of 3.412% semiannually to the counterparties, according to a state report on swaps last month. Including support costs, such as fees to auction agents, the Thruway was actually paying about 3.66%. In return, the counterparties were making monthly payments to the authority at 65% of the 1-month London Interbank Offered Rate.

The only time Libor hit a rate that would have produced a positive return for the issuer was in August 2007, and has generally been much lower. Last week Libor hit 0.25%. From Sept. 15, 2008, through March 15, the authority paid $8.1 million to counterparties while receiving $2.7 million, according to a state report.

"At the time we entered into the swaps, based on past history, we projected that they would provide savings," Anderson said. "As a result of changing circumstances in the wake of the unprecedented events of the last two years, we are making prudent adjustments to our portfolio as necessary, like any other business or issuer."

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