With a fresh upgrade to AAA from Standard & Poor's, the Nassau County, N.Y., Interim Finance Authority plans to refund $605.1 million of auction-rate securities market on Thursday. NIFA plans to refund an additional $125 million on May 30.

The bonds being marketed this week will be sold as variable-rate demand bonds in five series with various maturities out to 2025.

Sidley Austin LLP is bond counsel.

Goldman, Sachs & Co., M.R. Beal & Co., and Citi are remarketing agents on the bonds. Liquidity will be provided by BNP Paribas, KBC Bank, and Dexia Credit Local. Standard & Poor's assigned an A-1-plus short-term rating to the bonds.

In addition to refunding the authority's $719 million of ARS and paying issuance costs, the refunding will restructure about $7 million of NIFA's non-auction-rate debt to soften the blow to the county of increased debt service costs incurred from interest rate spikes when the auction-rate market collapsed in mid-February and NIFA's ARS began to fail.

The securities had been pricing to yield between 3% to 4% at the beginning of the year but reset as high as 15% when auctions failed, according to NIFA and Bloomberg. The securities reset at lower rates in April and May and in one case dropped to 2% this month.

Under the legislation that created NIFA in 2000, the agency owns all sales tax in Nassau and uses it to pay debt service and administrative costs before turning the remainder over to the county. By restructuring non-auction-rate debt, NIFA will spread out certain debt service payments so that Nassau County won't receive less sales tax revenue than anticipated even though NIFA had to use some of that revenue to pay higher rates on the auction-rate debt.

"I don't look at it as giving the county relief," said NIFA chairman Ronald Stack. "What we're trying to do is smooth the NIFA debt service. We had a big spike in NIFA debt service because of the demise of the auction-rate market."

Standard & Poor's upgraded NIFA one notch last week, citing strong debt service coverage and its lack of legal authority to issue new debt. NIFA's authorization to issue new debt ended last year, though it can still refund outstanding debt. In a credit report, Standard & Poor's also cited the "strong security afforded the debt through legal separation from the county of the revenue stream pledged to the bonds" as a reason for its rating.

Moody's Investors Service assigns its Aa2 and VIMG-1 short-term rating to the bonds. Fitch Ratings assigns its AA-plus and F-plus short-term rating to the bonds.

NIFA entered into swaps on $600 million of its ARS. One reason why NIFA is staying in variable-rate debt at this restructuring is that the swaps would cost an estimated $30 million to terminate, based on mark-to-market values about two weeks ago. The other reason, Stack said, was that NIFA wants to maintain its ratio of variable to fixed rate debt.

NIFA was created by the New York Legislature eight years ago when the Nassau County faced a fiscal crisis and Standard & Poor's had downgraded its debt to BBB-minus from A-minus. NIFA gave the county access to the debt market and has sold $2.51 billion of bonds, of which $1.96 billion is outstanding.

The county's credit rating has improved over the years and is now rated A by Standard & Poor's, a notch higher than before its fiscal crisis. Nassau returned to the market last year and plans to sell about $100 million of new-money bonds next month.

In March, Nassau County officials sought unsuccessfully for legislation that would have allowed them to refund NIFA's debt on the county's credit in an effort to eventually put the agency out of business. NIFA, which will exist as long as it has debt outstanding, also retains the authority to institute a control period over the county's finances under certain conditions.

Stack said that NIFA still plays an essential role in the county, which he compared to that of New York City's financial control board that helped the city out of its fiscal crisis in the 1970s, and "ensures that the future administrations try to keep their budgets in balance."


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