BRADENTON, Fla. - The financing arm of the University of South Florida believes it is one of the first issuers to convert auction-rate debt to another mode after working out a deal to keep the original bond insurance in place while adding a letter of credit.

The USF Financing Corp. converted $92.2 million of Series 2005B auction-rate certificates of participation to weekly mode variable-rate debt last week with triple-barreled enhancement, which included a letter of credit from Wachovia Bank NA, insurance from Ambac AssuranceCorp., and USF's own underlying credit rating. Variable-rate deals are usually enhanced with an LOC or insurance, but not both.

But many issuers in the auction-rate market, including USF, experienced extraordinarily high interest rates as the subprime blow-out led to downgrades of bond insurer ratings. Issuers that paid an upfront premium for triple-A-rated insurance on their auction-rate securities have been faced with tossing out that policy as they restructured deals.

Ambac has maintained its triple-A ratings from Standard & Poor's and Moody's Investors Service, while Fitch Ratings lowered its rating to AA from AAA.

Wachovia Securities is the remarketing agent.

Despite the high ratings, Ambac and other downgraded insured securities have traded off in the auction-rate and variable-rate markets, which has prompted many issuers to seek LOCs for conversions, said USF's financial adviser, David Moore with Public Financial Management Inc.

It cost USF approximately $1 million for the original Ambac policy, which included coverage for the Series 2005B COPs and $48 million of fixed-rate COPs, Series 2005A. "USF paid for insurance that was supposed to be good forever and they wanted to retain that," Moore said.

In addition to the cost, Moore said it made sense to keep the policy because Ambac still has two of its three triple-A ratings and it remains one of the dominant muni insurers. The hope is that Ambac will regain its gilt-edged ratings and the cost of the LOC will be a temporary expense, he said.

To bring the USF deal forward, there were prolonged discussions to resolve various issues, Moore said. Those included coming to an understanding about the role bond insurers have played in current market conditions for auction- and variable-rate debt.

"The municipal market is very important to Ambac's franchise," said the insurer's spokesperson Vandana Sharma. "We're committed to working closely with market participants to evaluate the situation we are in and to seek ways to resolve it."

For Ambac to consent to credit enhancement in the form of Wachovia's LOC is a step forward as the market turmoil unfolds, said Brian Fender, a shareholder at GrayRobinson PA, which is USF's disclosure counsel.

"I think it's a positive thing for the marketplace to see what Ambac is doing," Fender said. "It's a sign that Ambac is trying to go forward and work with existing clients. I also think it's a sign that Ambac is in the bond insurance market for the long term."

USF's bond counsel, Bryant Miller & Olive PA, could not be reached for comment.

Standard & Poor's rated the 2005B COPs AAA based on Ambac's insured rating. On an ongoing basis, Standard & Poor's said the rating would be based on whichever rating is highest - Ambac's, Wachovia's AA rating, or the A underlying rating of the USF Financing Corp.

Moody's Investors Service initially lowered its rating to match the Aa1 rating it assigns to Wachovia, while at the same time recognizing that the COPs are additionally supported by an Ambac bond insurance policy.

In an e-mail to The Bond Buyer on Thursday, Moody's spokesman Thomas Lemmon said the rating would be raised to triple-A, which matches Moody's rating for Ambac. No other information about the change in rating was provided.

The USF certificates were not rated by Fitch Ratings.

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