The failed auction that last week epitomized the problems of the municipal auction-rate securities market settled down yesterday as a Port Authority of New York and New Jersey series of auction-rate bonds that had spiked to 20% cleared yesterday at 8%. The rate is still higher than the 4.3% the bonds were at a week before.
Although the Port Authority only had a single auction failure last week, its other auction bonds also cleared at higher rates. Those have begun to come down as well.
"This is very good news and shows that the market may be stabilizing," Port Authority spokesman Steve Coleman said in an e-mail. "We are still working with our financial advisers, [Depfa] First Albany, on the best options for the future."
Those options could include refunding the bonds to put them into a different mode.
The Port Authority issued $700 million of versatile structure obligations, or VSOs, last year and those are the only auction-rate bonds among the authority's $11.5 billion of outstanding debt.
The failed auction was in the authority's Series 7C VSOs, which reset weekly and were sold at par of $100 million. When there was insufficient demand for the bonds last week, the auction failed sending the rate its maximum interest rate of 20% which had been set forth in the official statement, and left bondholders will illiquid securities. The bonds are insured by MBIA Insurance Corp.
In an auction-rate market that had already seen months of volatility and a few failures in the preceding weeks, the Port Authority's failure and others set off a storm that is still roiling the market.
Another series of the authority's auction-rate bonds, VSO Series 7A bonds, are in daily reset mode and shot up from 5% at the beginning of the week to 15% at midweek before falling to 10% on Friday.
The higher interest rates from Tuesday and Wednesday of last week alone cost the authority an additional $475,442 in debt service, according to figures supplied by the agency.
While the higher resets may have cost the authority money, it was boon to investors who may have been looking for more yield.
"For an investor who doesn't need the liquidity it's too good to be true - if it seems like it's too good to be true, it's going to correct itself," BNY Capital Markets Inc. managing director Fred Yosca said. "People know it went from failed to cleared so there's some restoration of confidence there, secondly people saw that it restored at 8% and people would probably be willing to own these things at 6%. So stay tuned."