A spate of failed auctions for issuers in New York that began Monday and expanded yesterday sent interest rates on some auction-rate bonds as high as 15% and 20% and issuers scrambled for solutions to the higher rate resets.
The failures didn't come as a big surprise to market participants who had seen volatility in the auction-rate market for months and some issuers are converting auction rate to variable-rate demand obligation bonds.
Three New York GO auctions totaling $35.2 million failed yesterday, and out of four auctions of the state's Local Government Assistance Corp. debt on Monday, one failed. Close to half - $4 billion - of the state's $8.4 billion of variable-rate debt is in auction-rate mode. The state has close to $50 billion of debt outstanding.
New York "is currently looking at its variable rate portfolio, undertaking an analysis, looking at the risks we have, and then we'll have to make some decisions going forward," said state budget director Laura Anglin. "But the state has a very large portfolio so it's not something we would hastily act on, but rather do a thorough analysis and look at where most risk is and make changes accordingly. We don't have a firm plan - we're currently undertaking a review."
The state issues most of its state-backed debt as personal income tax bonds through state authorities. If the state were to decide it wanted to convert auction-rate debt issued by those authorities, it would require the approval of the authorities' boards, Anglin said.
One division of budget staff member said the auction-rate market appeared to be shutting down.
"It is important to note that the unsuccessful auctions we experienced this week do not negatively reflect on our credit," Robert Whalen, spokesman for New York State Comptroller Thomas DiNapoli, said in an e-mail. "We have been closely following events in the muni market, and this week we experienced failed auctions for the first time. We were fortunate, however, that provisions in our bond documents helped us avoid a spike in our interest rates - we ended up [with new rates] within the range of 3% to 4%."
Whalen said it was difficult a this point in time to quantify the impact of the rate increases on the state budget.
The Dormitory Authority of the State of New York saw five auctions fail on Monday and three auctions fail yesterday. One failed series, Teachers College Insured Revenue Bonds Series 2007 reset to 15% from 3.115% . Bonds issued on behalf of Rockefeller University reset to 5.451% from 3.115%, and bonds for New York University reset to 6.23% from 3.115%. Two DASNY auctions were successful yesterday.
Several New York City auctions failed yesterday, including general obligation debt and New York City Municipal Water Finance Authority bonds, though details of the new rates weren't available at press time. New York City saw one auction fail on Monday for $48.8 million of bonds issued by the Jay Street Development Corp. that financed the construction of a court house.
"These failures are not related in any way to the credit of the city or it's associated issuers, but reflects what's going on in the auction market, the illiquidity, uncertainty over some of the monoline bond insurers, and technical factors such as low maximum interest rates on some bond series," New York City deputy comptroller for public finance Carol Kostik said. "We are monitoring the market. We have been developing some financing alternatives and if the market doesn't correct itself we will be taking some steps, but I don't have anything to discuss at this point."
Kostik said the market was "idiosyncratic" and that some auctions had cleared.
Deputy city budget director Alan Anders stressed that the amount of city debt in auction-rate mode is small compared to its overall debt portfolio.
The Port Authority of New York and New Jersey is looking at potentially refunding its auction-rate securities after an auction failed on Monday and interest rates reset to 20%.
Long Island Power Authority chief financial officer Elizabeth McCarthy said yesterday that two auctions failed Monday, and the New York Power Authority said that one of its auctions had failed. The New York Metropolitan Transportation Authority also had an auction fail on Monday, and a New York State Thruway Authority auction failed yesterday as well.
The New York City Housing Development Corp. has four conduit issuances that are in auction-rate mode. HDC will convert one of those into variable rate demand obligations on Friday. The New York State Housing Finance Agency has already converted or begun converting two auction rate series.
"This is just a wholesale dumping of the product for no real good reasons other than people are panicked or extremely risk averse," said Doreen Frasca, president of financial advisory firm Frasca & Associates, LLC. "It's kind of like the running of the bulls, when the bulls are stampeding you either get out of the way or you run with them and adopt a herd mentality."
One difficulty that issuers looking to convert to another mode such as VRDO is the cost of letters of credit, which has spiked. Frasca said she's seen LOC quotes for three year terms "north of 50 basis points" compared to a ten-year term for 16 basis points for one of her clients last June.
The turmoil is keeping bonds counsel busy as well.
"All of our clients that are in auction-rate are looking at their alternatives," said Sidley Austin LLP attorney Homer Schaaf.
In Alabama, where Jefferson County has used auction-rate securities extensively, county commission president Bettye Fine Collins said in a statement that the county is preparing a disclosure document concerning its debt.
"The recent downgrades of several bond insurers by the rating agencies is causing significant disruptions in the public finance markets generally, including substantial increases in the rates of interest borne by certain types of variable rate debt," said Collins. "We are taking the matter seriously and will be meeting with advisers to determine the appropriate course of action to deal with these developments, including preparation of a complete disclosure document. We will provide further information when that document is available."
Jefferson County's financial and swap adviser, Jim White, president of Birmingham-based Porter, White & Co., declined to comment.
Reporter Shelly Sigo contributed to this story