Market Update and Restructuring Options for Auction Rate Securities January 30, 2008

Transcription

1 Market Update and Restructuring Options for Auction Rate Securities January 30, 2008 presented by Public Financial Management 300 S. Orange Avenue, Suite 1170 Orlando. FL (407) (407) fax

2 Recent Events in the Tax-Exempt Market Structured Investment Summary as of January 28, 2008 Provider Transaction Balance as of 12/31/07 Rate S&P Moody's Fitch Outlook Outlook Outlook Societe Generale 2006A 89,989, Aa2 Aa2 Stable AA- Stable Depfa Bank 2007A 120,892, A+ Aa3 Stable AA- Stable Morgan Stanley & Co., Inc. 2007A 120,348, AA- Stable Aa3 AA- RBC Capital Markets 2007B 97,707, AA- Positive Aaa Stable AA- Stable Societe Generale was downgraded last week by Fitch from AA to AA-. Investment Agreements are fully collateralized with government securities. Remedies in the event of additional downgrades by S&P and Moody s include termination or assignment to an approved third party. 2

3 Recent Events in the Tax-Exempt Market Bond Insurers MBIA raised capital and Fitch affirms AAA rating and removes negative outlook. AMBAC failed to raise capital and Fitch downgraded to AA. XL downgraded to A by Fitch. The market treats FSA as the only clean insurer. Assured Guaranty trades 5bp to 10bp off of FSA and all other insurers are almost illiquid Market Dynamics FSA premiums are 3 to 4 times those seen in late LOC providers have doubled annual fees. Most recent event Many LOC providers refuse to wrap around insured financings (including FGIC) driving issuers to give up insurance or develop new options. Institutional investors are beginning to sell VRDOs backed by insurers without regard for strength of the liquidity provider. Downgrades will eventual trigger other concerns. Swaps collateral or termination Debt service reserve accounts replace surety bonds with cash or other credit support The primary focus for the District is: 2007B (discussed at most recent meeting). 2003B AMBAC insured VRDOs that were converted to fixed rates with a BMA swap. 3

4 Market Update and Summary of Agency Action MBIA obtained capital and Fitch affirmed AAA rating and removed watch Fitch downgrades AMBAC to AA and XL to A Insurer FGIC Aaa Aaa Stable Moody's Investor Services Standard & Poor's Services Fitch Services Revised Outlook Revised Outlook Revised Outlook Revised Outlook Revised Outlook Revised Outlook (12/14/2007) AAA AAA Stable (12/19/2007) AAA AAA Stable (12/17/2007) MBIA Aaa Aaa Stable (1/17/08) AAA AAA Stable (12/19/2007) AAA AAA Stable Stable (1/16/08) XL Capital Aaa Aaa Stable (12/14/2007) AAA AAA Stable (12/19/2007) AAA A Stable (1/24/2008) FSA Aaa Aaa Stable Stable AAA AAA Stable Stable AAA AAA Stable Stable CIFG Aaa Aaa Stable (12/14/2007) AAA AAA Stable (6/7/2007) AAA AAA Stable Stable Assured Guaranty Aaa Aaa Stable Stable AAA AAA Stable Stable AAA AAA Stable Stable Ambac Aaa Aaa Stable (1/16/08) AAA AAA Stable (12/19/2007) AAA AA Stable (1/18/2008) ACA NR A CCC (12/19/2007) Watch Developing Watch (12/19/2007) NR Radian Aa3 Aa3 Stable Stable AA AA Stable (6/29/2007) AA A+ (9/5/2007) Watch (7/31/2007) Evolving Watch (9/5/2007) 4

5 Sub-prime Meltdown Impact on District COPs 2007B Auction Rate COPs that continue to trade off significantly. 5.5% 5.0% 4.5% Variable Rates - Since Issuance of Series 2007B COPs 2003B Since these are AMBAC insured, institutional investors are putting the COPs back, driving up recent resets. To early to determine if this is a transient or long term issue. Rates 4.0% 3.5% 3.0% 2.5% 3/22/07 5/22/07 7/22/07 9/22/07 11/22/07 1/22/08 SIFMA Rate 2002B VRDO (FSA) 2003B VRDB (Ambac) 2007B ARS (FGIC) 2002B Only other variable rate COPs. VRDOs insured by FSA with Dexia liquidity. Viewed as strongest possible combination in the market. Spread to SIFMA Variable Rates - Since Issuance of Series 2007B COPs (25) 3/22/07 5/22/07 7/22/07 9/22/07 11/22/07 1/22/ B VRDO (FSA) 2003B VRDB (Ambac) 2007B ARS (FGIC) 5

6 Conversion of 2007B COPs Original Plan: Convert to VRDOs with strong liquidity Market is now penalizing based on underlying insurer (FGIC) so adding liquidity is not as beneficial. Other Options: Wrap an LOC around existing insured COPs Limited interest from strong LOC providers and fees are trending toward 40+ basis points. Refund to fixed rate - insured Eliminates benefit of ALM and only FSA is acceptable to the market, driving up costs. Refund to fixed rate uninsured Long-term this is a viable option. Currently all COPs are insured because of unique characteristics of the COP structure. In the unstable market, offering a new credit concept would likely be extremely expensive (i.e. higher interest rates). Convert to 2/3 year term mode Market is willing to accept based primarily on the District s strong credit rating. Narrow investor base requires quick movement. 6

7 Conversion of 2007B COPs Recommendation Pursue term-out option Retains value of insurance Avoids impact of any market changes for 2/3 years Locks in favorable interest rates for the near term Same renewal credit risk as VRDO (renegotiate in 2/3 years) Summary of Estimated All-In Costs of Alternatives Current (average of Convert to VRDO last 2 months) w/fgic Convert to 2/3 year mode Par Amount 119,400, ,400, ,400,000 Upfront/One time costs Costs of Issuance ($) - 357, ,135 Underwriters Discount ($) 119, ,500 Credit Enhancement ($) - 10,000 - Total Upfront Costs ($) - 486, ,635 Total Upfront Costs (bp) Ongoing Costs Liquidity/LOC Remarketing/Broker Dealer Total Ongoing Costs (bp) Net Ongoing Costs (bp) Interest Rate 4.48% 3.55% 3.05% % Net Interest Rate 4.74% 3.92% 3.10% % Assumed SIFMA average moving forward 3.50% Par Amount 119,400,000 Total Debt Service 195,000,000 PV01 140,000 Insurance (bp) 60 7

8 Moving Forward Place 2007B COPs in term mode as soon as possible If market will not accept, move forward with LOC structure. Monitor resets for 2003B COPs Develop options for conversion of 2003B in the event VRDO spread with AMBAC insurance remains wide to SIFMA. 8