Auction-rate crunch sends issuers in search of alternatives; Mecklenburg prices variable-rate bonds

By Cristal Cody and Sheri Kasprzak

New York, Feb. 21 - The meltdown in auction-rate securities is sending some municipals issuers looking for a way to refund or restructure their current auction-rate holdings.

But others felt confident enough with their variable-rate offerings to proceed with their pricings Thursday, with the prime example being Mecklenburg County in North Carolina. Mecklenburg priced $125 million in variable-rate certificates of participation Thursday.

Even so, BJC Health System is seeking to refund, convert or restructure $243.575 million of its auction-rate securities, a statement from the system said Thursday.

It was one of several issuers with auction-rate bonds taking actions to improve their rates or move to a fixed-rate mode.

The bonds BJC plans to convert or restructure were originally sold from July 2006 to December 2007.

"As has been widely reported in the national business press, the tax-exempt auction-rate markets have experienced extreme disruptions in the past few months and particularly in the past week," BJC's statement indicated.

BJC itself has not experienced any failed auctions, it noted, but added that auction rates have increased in the past few weeks.

The clearing bid for its 2006A bonds was 3.75% on Feb. 12, the corporation said. The clearing bid for the 2006B bonds was 11.99% on Feb. 13 and the clearing bid for its series 2006C bonds was 9.05% on Feb. 14.

The clearing bid for the 2006A bonds was 6% on Feb. 19 and the clearing bid for the 2006B bonds was 8.255% on Feb. 20. The maximum rate on the bonds is 12%.

The conversion, restructure or refunding of the bonds will happen before May 15.

Other issuers respond in kind

Washington Health Care Facilities Authority plans to convert its 2006E auction-rate revenue bonds to a fixed-rate mode, the authority said Thursday, in response to auction-rate market woes.

The authority plans to convert the bonds, sold on behalf of Providence Services and Health, on April 18, a statement said Thursday.

University of Pittsburgh Medical Center also responded to the auction-market troubles by tendering for some of its auction-rate bonds.

"The current turmoil in the auction-rate bond market and resulting spike in interest rates prompted UPMC to offer to purchase certain of its auction bonds from investors at a price of 100.01% of par on any business day up until March 19, 2008," said a statement released by University of Pittsburgh Medical Center released Thursday.

The center noted that the action had helped stabilize its borrowing costs.

"Most importantly, its clearing rate has dropped from last week's double-digit levels to 7% on Thursday and 5.35% yesterday [Wednesday]. UPMC is hoping for similar reductions in the three auctions scheduled for today [Thursday]. These auctions are with Goldman, Sachs; Morgan Stanley; and UBS," a UPMC statement said Thursday.

And Duke Energy in Charlotte, N.C., plans to refund and refinance $883 million tax-exempt auction-rate bonds, the company said in a statement Thursday.

Subsidiaries Duke Energy Carolinas LLC, Duke Energy Ohio Inc., Duke Energy Indiana Inc. and Duke Energy Kentucky Inc. intend to refinance the obligations by pricing an equivalent amount of tax-exempt bonds over the next several weeks.

Duke Energy said it is pursuing the refunding plans in reaction to increased interest rates payable on the auction-rate bonds.

King County hospital postpones deal

As issuers left with outstanding variable-rate bonds look for ways out, more than one issuer is putting off its offering until the market improves.

Public Hospital District 1 in King County, Wash., postponed its sale of $115 million limited tax and general obligation bonds because of the auction rate market troubles, the issuer told Prospect News Thursday.

The hospital district now plans to price $220 million limited tax general obligation and refunding bonds within a couple weeks, said Jeannine Grinnell, vice president of finance and treasurer for Public Hospital District 1, also known as Valley Medical Center. The original bonds had been planned to price Wednesday.

The $115 million series 2008A bonds (Aaa/AAA/AAA) are insured by Assured Guaranty. The $105 million series 2008B bonds (A1/AA-) are not insured.

Morgan Stanley is the underwriter of the negotiated sale.

Proceeds will be used to refund the district's outstanding series 2005A and 2005B hospital facilities revenue bonds and series 2006A and 2006B limited tax general obligation bonds. The previous sale would have refunded only series 2005A and 2005B bonds.

"The $115 million included $65 million refunding and the rest in new money," Grinnell said. "Because of the auction rate market dislocation last week, we also have now included our 2006 series. It was $105 million and we are refunding it from an auction rate to a fixed rate. We felt like moving to a fixed rate was the best move."

The pricing now includes $170 million that will be refunded with $50 million in new money for the district, she said.

Earlier this week, Orange County School Board in Florida indefinitely postponed its sale of $86.58 million variable rate refunding certificates of participation, said Steve Compton, senior administrator of the district's treasury services.

The district already has variable rate issues outstanding and decided to wait until the market stabilizes, he said Wednesday.

"It's because of the variable rate market," he said.

"Plus, we already have variable rate issues out there. We're going to take care of the variable rate we have right now with the insurers. I couldn't even guess as to when we could start this back up the way the markets are the way they are. Doesn't appear that's it's going to be settling down soon."

Mecklenburg County's variable-rate bonds

One issuer wasn't deterred at all by the crisis.

Mecklenburg County in North Carolina priced $125 million in variable-rate certificates of participation (Aa1/AA+/AA+) on Thursday with an initial rate of 2.3%, said Dena Diorio, the county's director of finance.

"It's more of a letter of credit type pricing and those are still trading very reasonably," a sell-sider told Prospect News, when asked if the county had any plans to back out of the variable-rate deal.

Though the sale was made on a competitive basis, Diorio said several banks won the bid, but she didn't have a full list immediately available.

Proceeds will be used for school, court, detention center, community college and park projects.

Fort Lauderdale bonds price

Fort Lauderdale moved ahead with its pricing Thursday of $155 million water and sewer revenue bonds in a competitive sale won by Wachovia Securities. The bonds priced with a true interest cost of 4.727%, the city's financial advisor told Prospect News.

The bonds (Aa2) priced with coupons from 4% in 2009 to 5% in 2036 with yields from 2.05% to 4.98%, said Frank Hall Jr., president of Fidelity Financial Services in Hollywood, Fla.

Proceeds will fund improvements to two water treatment plants, enhance the water supply system with new wells and sewer extension through the city.

El Paso prices G.O.s

El Paso, Texas, also priced $56.655 million general obligation bonds and $21.425 million refunding bonds on Thursday, city manager Bill Studer told Prospect News.

The $56.655 million series 2008 bonds and the $21.425 million series 2008A refunding bonds were being sold in a negotiated sale led by Banc of America Securities. Morgan Stanley and Wachovia Bank are the co-managers.

Series 2008 bonds have serial maturities from 2010 to 2033, and series 2008A bonds mature 2009 through 2014.

The final pricing terms were not available.

Proceeds from the 2008 bonds are for improvements to city's park, zoo, library and history museum; improvements to city streets, fire, police and public facilities. Proceeds from the 2008A bonds will be used to refund part of the city's outstanding debt

Howard Hughes sells bonds

Howard Hughes Medical Institute was expected to price $83.5 million multi-modal revenue bonds on Thursday through the Maryland Economic Development Corp.

The series 2008A bonds (Aaa/VMIG1) were being sold in a negotiated sale managed by Citigroup Global Markets.

Proceeds will be used to renovate and expand administrative headquarters.

No additional details could be gathered by press time Thursday.

MEAG plans big offering

Looking ahead, several issuers are out in the market this month with substantial deals, led by a $246.445 million offering from the Municipal Electric Authority of Georgia.

The authority confirmed it will price several bonds (A2) totaling $246.445 million on Feb. 26.

The competitive offering includes $106.82 million in series 2008A project one subordinated taxable bonds, $57.475 million in series 2008A general resolution projects subordinated taxable bonds, $39.575 million in series 2008B project one subordinated tax-exempt bonds and $42.575 million in series 2008B general resolution projects subordinated tax-exempt bonds, according to a preliminary official statement released Thursday.

The 2008A project one subordinated taxable bonds have a serial structure from 2008 to 2019 and the 2008A general resolution projects subordinated taxable bonds are due from 2008 to 2020.

The 2008B project one subordinated tax-exempt bonds are due from 2009 to 2023 and the 2008B general resolution projects subordinated tax-exempt bonds are also due from 2009 to 2023.

Proceeds from the bonds will be used to refund the authority's series 2000A general resolution project subordinated taxable bonds and its 2000B project one subordinated taxable bonds. The remaining proceeds will refund certain of the authority's tax-exempt commercial paper notes.

The deal settles March 3.

New York Dormitory Authority plans deal

Also coming up this month is a $276.445 million offering of state personal income tax revenue bonds from the Dormitory Authority of the State of New York, a preliminary official statement said. The bonds are set to price later this month, but the exact pricing date was not immediately available.

The offering includes $112.44 million in series 2008A economic development and housing bonds, $94.465 million in series 2008B federally taxable economic development and housing bonds and $69.54 million in series 2008A healthcare bonds (AAA/AA).

Loop Capital Markets is the lead agent for the 2008A economic development and housing bonds and the 2008A healthcare bonds.

The 2008B federally taxable economic development and housing bonds will be sold on a negotiated basis through lead agent M.R. Beal & Co.

The 2008A economic development and housing bonds are due from 2008 to 2017 and the 2008B federally taxable economic development bonds are also due from 2008 to 2017.

The 2008A healthcare bonds are due in a serial structure from 2009 to 2018 with term bonds due in 2023, 2028, 2033 and 2037.

Proceeds from the 2008A and 2008B economic development bonds will be used for capital expenses on several programs. The 2008A healthcare bonds will be used for grants to healthcare institutions under the HEAL NY program.

Spring Branch school district to price

Another sizable deal comes from the Spring Branch Independent School District in Houston. The issuer plans to price $194.6 million limited tax schoolhouse bonds on Monday.

The series 2008 bonds will be sold competitively, a source said Thursday.

First Southwest Co. in Houston is the financial advisor.

The bonds (Aaa/AAA) have serial maturities from 2009 through 2038.

Proceeds will be used to acquire sites for schools, purchase buses, equip buildings and upgrade technology.

Chattanooga utility to bring bonds

The Electric Power Board of Chattanooga, Tenn., plans to price $215.075 million electric system revenue bonds on Tuesday, Greg Eaves, the board's chief financial officer, told Prospect News.

The series 2008A bonds (AA/AA) mature 2013 to 2028 with a term bond due 2033, he said.

Goldman, Sachs & Co. is the lead manager, with Banc of America Securities, Merrill Lynch & Co., Morgan Keegan & Co. and Sun Trust Robinson Humphrey as co-managers.

Proceeds will be used to finance a fiber optic broadband network and various capital improvements for the electric system.

Atlanta's Children's Healthcare bonds to price

Children's Healthcare of Atlanta plans to price $193 million bonds and certificates on Wednesday, according to a release from Moody's Investors Service.

The $72.965 million series 2008A variable rate demand bonds will be issued through the Development Authority of Fulton County. The $120 million 2008B variable rate demand certificates will be issued through the DeKalb Private Hospital Authority.

Moody's assigned an Aa2/VMIG1 rating to the bonds and certificates on Thursday.

Proceeds will be used to refund series 2005A and 2005C bonds and reimburse prior capital expenditures.

Additional information was not available.

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