The city of New Orleans is in final negotiations about a $180 million bond refinance deal that will help it to avoid a crippling 2013 payment on an old bond deal, Deputy Mayor and Chief Administrative Officer Andy Kopplin told Gambit last week.
The New Orleans Bureau of Purchasing issued a request for proposals on a refinancing package — worth up to $200 million including costs of issuance — in July, and city officials approved one of the responsive bids on August 21. The deal is still in negotiations and has not yet been signed by Mayor Mitch Landrieu, Kopplin said.
The bulk of that money will be used to refinance a highly complex — and ultimately failed — 2000 bond deal and interest swap agreement. The refinance will help the city avoid a $115 million payout on the remaining principal amount from the 2000 deal, which would be due in March 2013.
“We have continued to move forward on that,” he said. “We’ve selected Raymond James and JPMorgan Chase as the lead underwriting team.”
When completed, the city will have terminated $115 million in outstanding debt on $170 million in taxable pension revenue bonds. The Series 2000 bonds were issued to finance the city’s obligations to the New Orleans Firefighters Pension (the old system for firefighters hired before 1968), as well as terminate an interest rate swap the city entered as part of the deal with its bond remarketing agent, UBS.
Terminating the swap could cost tens of millions of dollars, but that is still far less than the scheduled balloon payment. And a new, simpler deal will save the city millions in the long-run, Kopplin told the City Council Budget Committee last May.
Repayment on the Series 2000 bonds has cost the city about $19 million per year since 2008. Those large payments have been based in part on the London Interbank Offered Rate (LIBOR), which, it turns out, was manipulated in a way that may have cost New Orleans, and many other cities, a lot of money.
The city of Baltimore is leading a class-action lawsuit against banks that set the LIBOR rate. UBS is one of the defendants in that suit.
(More after the jump)
To make them more marketable to bondholders, the Series 2000 bonds were marketed at a variable rate, with a 15 percent maximum rate. The rate would be based on what investors would be willing to buy and be set by the city’s remarketing agent, PaineWebber Capital Services (a subsidiary of Swiss banking giant UBS AG).
The city purchased bond insurance and credit rate enhancement from Ambac Assurance Corp., which at the time had a AAA credit rating. The city also attempted to shield itself from drastic increases to the variable interest rate by entering into an interest rate swap with PaineWebber Capital Services, Inc.
Under the terms of the swap, the city would pay a fixed rate of 6.95 percent on the bonds, and UBS would pay back the market interest rate. So, on one hand, if the market rate were 5 percent, the city would still owe UBS 6.95 percent interest, and the bank would keep the additional 1.95 percent. But if the rate went to 8 percent, the city would pay UBS 6.95 percent and would owe the city 1.05 percent back.
UBS, meanwhile, entered into a reciprocal swap with Ambac Financial Services (AFS), Ambac Assurance’s parent company, wherein it would pay AFS 6.8 percent, and AFS would assume the risk of the variable rate.
In the event of a major problem or “rate change event,” the bonds would be taken off the market held by the city’s bank, Chase. UBS wouldn’t calculate its payments to the city in the same way. Rather, it and Ambac would then have the option of switching to a payment based on 30-day LIBOR.
The rate change event happened in early 2008, when Ambac lost its AAA rating. Even though the bonds were still in demand at an 8 percent interest rate that year, according to a lawsuit the city filed against UBS and Ambac in July 2008, the firms moved to stop remarketing the bonds and switch to the LIBOR-based calculation. The city then started paying Chase 5-6 percent annual interest on the bank bonds. And it still owed 6.95 percent to UBS. UBS and Ambac were only paying the city back the 30-day LIBOR, which in June 2008 was quite low, only 2.46 percent, according to the lawsuit.
“Under present circumstances, exercise of the LIBOR Index option under the swap increases the City’s debt service by about $400,000 per month,” reads the city’s initial complaint in the suit.
That suit was suspended in late 2011. The city and UBS are currently in negotiations, Kopplin said.
Asked whether the city has weighed becoming a party to any LIBOR litigation, Kopplin said, “Yes, is the short answer ... We are already in litigation against UBS. We’ve already filed a suit several years ago against UBS. That suit is presently in a holding pattern so that we may negotiate with UBS a settlement. So, obviously, those negotiations are confidential. But both UBS and the city are following closely the LIBOR litigation.”
“We’re well aware that this was a swap with a LIBOR-based calculation,” he said.
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