DALLAS - Oklahoma Treasurer Scott Meacham said Friday he is frustrated and angry after remarketers rejected the state's offer to buy $125.7 million of its own bonds that reset at 7% and 8% when the bond insurer's rating dropped below triple-A.
The auction-rate bonds issued by the Oklahoma Capitol Improvement Authority were paying 2.25% in mid-February, Meacham said, but rose steadily to higher rates when the insurer of the bonds, CIFG Assurance NA, was downgraded to A1 by Moody's Investors Service, AA-minus by Fitch Ratings, and A-plus by Standard & Poor's.
"It's a really weird situation," Meacham said Friday. "It would be better for us if the auction failed, because then the bonds would go to the liquidity facility provider [Fortis Bank] at 6%. That's not great, but it is better than 8%, which cannot be justified based on the underlying credit."
"Those higher rates just don't make sense," he added. "They should look at the underlying credit, which is very good. It is just that the insurance went bad."
Meacham sent a letter on Friday to the remarketers, Goldman, Sachs & Co. and Lehman Brothers, to put into writing his offer to buy all the bonds at 4.31%, but said his offer was quickly rejected.
"We've been offering for a week to buy any or all of those bonds at 4.31% and they keep giving us the runaround," he said. "I got a call from Goldman Sachs this morning that they rejected the offer but would sell us the bonds at 8%. Well, I don't want them at 8% when the real rate should be no higher than 3%."
"I am totally frustrated," Meacham said. "The remarketers are supposed to get the best rates they can for their client, which is the Oklahoma Capitol Improvement Authority. Instead, I'm concerned that they are holding those bonds for their large institutional investors. They are totally ignoring the best interest of their client."
The remarketing agents split the issue, with Goldman responsible for $65.7 million of the bonds and Lehman for $60 million.
In a statement released on Friday afternoon, a Goldman spokesman said the firm "will continue to work with the state to resolve all issues to allow it to achieve its objectives." Lehman Brothers declined to respond to questions on the Oklahoma situation.
Meacham said he is considering asking Oklahoma Attorney General Drew Edmondson to investigate what he called "the incestuous relationship" between the remarketers and investment bankers.
"Somebody needs to take a look at this," he said. "There is not enough separation between the remarketers and institutional investors. Something smells."
Meacham said he did not know how long the standoff between the state and the remarketers would last.
"The longer it takes just adds to the damages that could be sought in a lawsuit," he said.
The refusal to sell the bonds at 4.31% is costing the state at least an additional $6,000 a day in higher debt service, according to the treasurer.
"It's a big deal to us," he said. "We're on a tight budget like a lot of states, and now we will have to raise the rental payments for the colleges to pay this higher debt service because Lehman Brothers and Goldman Sachs aren't getting the best deal they could for their client."
In the letter faxed to executives at the remarketing firms on Friday, Meacham said he would purchase the bonds as part of the treasurer's investment portfolio.
The authority sold the bonds through negotiation in April 2006 to finance projects at state colleges and universities. The state decided to lower the debt service requirements by issuing the bonds as variable-rate debt that reset daily.
The authority paid for the projects with the bond proceeds, and then leased the facilities to the schools. The Legislature supports the bonds with appropriations to the State Regents for Higher Education, which uses the annual appropriations to make the lease payments.
The daily rate bonds were rated triple-A with the insurance enhancement when they were issued, with short-term underlying ratings of A-1-plus from Standard & Poor's and VMIG-1 from Moody's.
UBS Securities LLC was the managing underwriter on the transaction, with JPMorgan as co-senior manager and Citi, Capital West Securities, BOSC, Edward D. Jones, and A.G. Edwards & Sons Inc. as co-managers.
The Floyd Law Firm of Norman is the authority's bond counsel.
Meacham said the Oklahoma Capitol Improvement Authority bonds are the only variable-rate debt now causing a concern for the state.
"We had a situation with some bonds issued by the Oklahoma Municipal Power Authority, but we were able to work with Morgan Keegan & Co. to resolve that," he said. "We also had some problems with bonds issued by the Oklahoma Turnpike Authority, but we have a solution.