BRADENTON, Fla. - The negative watch placed on the Alabama Public School and College Authority by Standard & Poor's on March 27 is unwarranted, state finance director Jim Main said this week.
Standard & Poor's placed the AA rating on negative watch because of unresolved legal issues regarding a swap option with the APSCA that JPMorgan exercised last year. A payment is due May 1 on the swap option, which is on parity with the authority's debt, the agency said.
The APSCA's bonds are rated Aa2 by Moody's Investors Service.
"I want to say as strongly as I possibly can the state of Alabama and the APSCA have not and will not default on their debt obligations," Main said in a statement late Tuesday.
Last October, the agency filed a complaint in federal court asking a judge to void a 1998 swaption with JPMorgan citing a number of reasons why the derivative should be invalidated, including that it was not a legitimate hedging transaction under Alabama law.
In mid-December, JPMorgan filed a motion seeking to have the case dismissed saying Alabama's suit was "a baseless attempt by a public authority to escape its clear contractual commitments." No court rulings have ever been made in the case, nor have any hearings been scheduled to date.
"We filed the declaratory judgment action because there are significant legal issues associated with the swap transaction," Main said. "It would not be proper for me to authorize the use of taxpayer money for any payment due under the agreements until the court resolves those issues and determines our rights and obligations."
He said the APSCA advised Standard & Poor's and Moody's that until the court rules the authority will not accept payments from or make the initial payment to JPMorgan regarding the swap option exercised by the firm. Main added that the state also has provided both rating agencies with additional information about the situation. He hoped Standard & Poor's would "modify its position," he said.
"We have been communicating with the state and it is something that we will continue to evaluate," said Moody's analyst Ted Hampton. "The state has communicated to us, as it has the market, that it is not a question of ability to make payments on its bond or swap obligation."
Standard & Poor's analyst Sussan Corson said last month that the potential existed for swap termination payments that could lower debt service coverage. Termination of the 1998 swap option was estimated to cost nearly $55 million, which would drop debt service coverage to 1.17 times, Corson said. The authority has other so-called swaptions and terminating those would cost approximately $131 million.
Corson said yesterday that Standard & Poor's is reviewing the additional information supplied by the state.
"This is not about willingness or capacity to meet our obligations," Main said. "The resources of APSCA significantly exceed its annual debt service requirements."
In fiscal 2008, the authority pledged revenues covered debt service by 9.9 times, Main said, adding that even with a projected 12.6% decline in fiscal 2009 revenue, the debt would be covered by 8.5 times.
The next payment on the Series 1998 APSCA bonds is due on May 1 and will be paid as scheduled, according to Main. All other scheduled payments of principal and interest will be paid in the regular course of business as they are due, he said.
