Riverside will refund all of its outstanding auction-rate securities over the next three weeks, said chief financial officer Paul Sundeen.
The city began restructuring $430 million of ARS with $128 million of certificates of participation for the Riverside Renaissance Projects that priced yesterday. The net interest rate on the refunded COPs — insured by Ambac Assurance Corp. — jumped to about 7% from 3.4% after the auction-rate market blew up earlier this year.
The new COPs were issued as variable-rate demand obligations in weekly mode, backed by a letter of credit from Bank of America. Banc of America Securities LLC was the underwriter on the deal. The debt will mature over the next 29 years, and the city entered a swap agreement with Banc of America to synthetically fix the interest rate.
Riverside, the largest city in the Inland Empire east of Los Angeles, plans to issue another $300 million to refund ARS in the coming weeks, including $30 million of pension bonds, $196 million of electric utility revenue bonds, and $61 million of water revenue bonds. The bonds — which faced rates as high as 12% on one of the electric utility series — are currently costing the city about 4.5%. Bank of America will also provide the letter of credit, while its securities unit will underwrite the deals.
Sundeen expects to cut the rates on all of his ARS to less than 4% after restructuring.
The auction market’s turmoil has cost the city as much as $1 million in extra interest and reissuance costs thus far, Sundeen estimated. He said that’s “not a problem” for Riverside because its fiscal 2007-2008 budget was about $1.1 billion, but it is money he could have better spent elsewhere.
“We’re paying fairly healthy letter-of-credit fees because there are darn few places to go to get letters of credit right now,” he said. Sundeen estimated the city is paying about 40 basis points on the LOCs, more than double what he would have paid six months ago.
He said he felt “ very fortunate” that the city had a long-term relationship with a bank that offered a letter of credit, adding that it got a “very favorable rate” in the current environment. “If you don’t have a relationship, you just don’t get a letter of credit,” he said.
Sundeen said the city plans to be an active issuer in the coming months — in addition to the ARS restructuring — with another $50 million of bonds for its redevelopment agency, $20 million for a community facilities district, $250 million of sewer revenue bonds, and $270 of electric and water revenue bonds.
Riverside’s general obligation bonds are rated AA by Fitch Ratings and AA-minus by Standard & Poor’s.