DALLAS – The New Mexico Board of Finance will meet in emergency session Friday to resolve the mistaken refunding of $79.8 million of general obligation bonds that weren't callable.
After closing on the bonds Aug. 1, a staff member at the New Mexico Department of Finance and Administration discovered that the 2015 issue to be refunded was not callable, according to financial advisor David Paul, president of Fiscal Strategies Group.
“While we thought that the 2015 bonds were callable, it turns out they were non-callable,” Paul said.
New Mexico sold $300.3 million of general obligation bonds competitively on July 18. Proceeds of about $79.8 million were earmarked for an advance refunding of Series 2015 general obligation bonds maturing serially from 2018 through 2025.
As is typically done in an advance refunding, the $79.8 million in proceeds were placed in an escrow account invested in Treasuries, said Leila Kleats, director of the Board of Finance. The escrow account was designed to defease the bonds when they were called.
On Aug. 1, New Mexico posted a notice of defeasance and redemption on the Municipal Securities Rulemaking Board's EMMA website for 2015 GO series maturing in 2021 through 2025, which was the longest maturity in that issue.
On Aug. 8, it posted a recall of the week-old redemption notice.
"The Bonds are not subject to optional redemption in advance of their maturity dates as suggested by the Notice," the August 8 recall said. "It is expected that an Amended and Restated Notice of Defeasance and Redemption will be filed by the Treasurer in a separate filing."
The fact that the bonds are not callable before their maturity dates means that the escrow account must be maintained through 2025, the final maturity date, Kleats said.
“The assumption was that they were callable,” Kleats said.
Call provisions in the official statement for the 2015 bonds originally stated that bonds maturing on or before March 1, 2020 were subject to optional redemption. However, a supplemental statement on Feb. 17, 2015 corrected that provision, saying those bonds were not callable. Ten-year call protection is a common practice for tax-exempt bonds.
In addition to his firm, New Mexico's bond counsel, underwriters counsel and others failed to catch the error, Paul acknowledged. The board staff member found the error in re-reading the official statement for the refunded bonds, Paul said. As a result, the original 2015 issue and the advance refunding bonds will both be outstanding at the same time, Paul said.
Rodey Dickason Sloan Akin & Robb, P.A. and Sherman & Howard L.L.C. were co-bond counsel on the refunding deal, according to the official statement. Kutak Rock LLP was disclosure counsel. Citi led the syndicate that won the competitive deal.
To conform to tax law, the board will restructure the escrow fund with investments in tax-exempt securities.
If the board approves the new escrow investments, a disclosure notice will be filed, along with “other related actions,” according to a meeting notice.