Auction-rate crisis sparks more reofferings; Essentia prices $293.50 million variable-rate demand bonds

By Cristal Cody and Sheri Kasprzak

New York, March 3 - February was a tough month for municipals, with woes in auction-rate securities and the bond insurance sector putting some issuers off of their deals.

"It has been slow going," admitted one sell-side source.

"I've been in this business for 15 years and it's not often we see it this slow. Maybe once or twice before. There are a couple of things going on here. Bond insurers are in trouble and variable-rate bonds are in serious trouble."

In fact, many issuers of auction-rate securities have opted to convert or reoffer those bonds in an effort to secure a fixed rate. Along with failed auctions, bond insurance companies have been hit hard by the subprime mortgage crisis and rating agencies are standing at the ready to slash ratings. Some issuers are now choosing to go uninsured, but that only works for issuers confident in their standalone ratings.

Still, with billions of dollars of offerings in the pipeline for this week, some issuers aren't letting the abysmal market conditions stop them.

The North Texas Tollway Authority plans to bring $2.315 billion in revenue refunding bonds (A2/A-) on Thursday, the Puerto Rico Aqueduct & Sewer Authority will price $1.461 billion in revenue refunding bonds (Baa3/BBB-/BBB-) on Thursday and the State of California will bring $1.75 billion in general obligation bonds (A1/A+/A+) on Wednesday. Importantly, California plans to sell its G.O.s without insurance.

Auction-rate issuers repurchase bonds

Among the issuers conducting reoffers for auction-rate securities is the Vernon Natural Gas Financing Authority in California, which announced plans to convert $413.185 million in variable-rate demand bonds to a long-term rate this week, the issuer confirmed.

The series 2006 A-1, A-2, A-4, B and C bonds bear interest at the new rate beginning March 31, 2008, and ending Aug. 1, 2009.

"We have no problem with financing or restructuring at this time. We have enough cash to pay the increased interest rates for the next couple of months, but obviously we don't want to continue to pay these high rates," said Roy Burnett, director of finance for Vernon.

The weekly interest rate now is 7.5% to 10%, he said.

Bonds to be converted include $47.5 million in series 2006A-1 bonds, $47.55 million in series 2006A-2 bonds, $47.5 million in series 2006A-4 bonds, $107.73 million in series 2006B bonds and $115.405 million in series 2006C bonds.

The authority plans to remarket the bonds this week with a 3.7% interest rate goal, Burnett said.

"Everybody is trying to do the same thing we are," he said. "Even though we're a triple A rating municipality, we have to sit down on Wall Street and negotiate. The whole market is in an uproar."

The remarketing agent is Citigroup.

Among other issuers tackling the problem, the University of Pittsburgh Medical Center said it has bought back $128 million in auction-rate bonds via the interest-rate reset process.

The hospital will extend the offer to bonds set to auction in the coming week.

"The current turmoil in the auction-rate bonds market and resulting spike in interest rates prompted UPMC to offer to purchase its auction bonds from investors at a price of 100.01% of the par amount on any business day up until the date specified in UPMC's invitation to tender for the specific bonds," said a statement from the hospital released Monday.

Other conversion coming

Elsewhere, Miami-Dade County in Florida plans to remarket $139.7 million in series 2003E aviation revenue refunding bonds for Miami International Airport.

The bonds are being remarketed in an effort to secure a fixed rate on the variable-rate bonds. The mode change date for the bonds is expected to be March 17, according to a preliminary official statement released Monday.

Lehman Brothers is the remarketing agent.

The bonds have a serial structure from 2010 to 2024.

Proceeds will be used for capital improvement projects.

In other news, Gregg County Health Facilities Development Corp. in Texas announced it will convert $85 million hospital revenue bonds on Thursday.

The series 2006B and 2006C variable rate revenue bonds (Aaa/VMIG1) for the Good Shepherd Medical Center originally priced as auction-rate securities on Nov. 8, 2006.

The bonds will be converted to bear interest at a daily variable rate, according to a preliminary official statement released Friday.

Goldman, Sachs & Co. is the remarketing agent.

The Health Care Authority of Huntsville, Ala., converted $97.815 series 2005-A bonds to a weekly mode with a 3% initial interest rate on Monday, the issuer told Prospect News.

The credit-backed bonds (Aaa/A+/-) had a term rate that matured on Monday, said Johnny Wilson, cash debt manager for Huntsville Hospital.

"The bonds were callable today, and we converted the term to a weekly variable rate," he said.

The bonds are due June 1, 2034.

Merrill Lynch & Co. is the remarketing agent.

Essentia prices variable-rate bonds

Despite the troubles in the auction-rate sector, Essentia Health with operations in Wisconsin, North Dakota and Minnesota was expected to price $293.495 million in healthcare facilities variable-rate demand revenue bonds (F1+/A-1+). Details were not available.

The offering included $30.55 million in series 2008A-1 bonds for Cass County, N.D., $30.55 million in series 2008A-2 bonds for Cass County, $12.975 million in series 2008B-1 Wisconsin Health and Education Facilities Authority healthcare facilities variable-rate demand revenue bonds, $40.65 million series 2008C-3 Minnesota Agricultural and Economic Development board bonds and $40.295 million in series 2008C-5 taxable convertible Minnesota Agricultural and Economic Development Board bonds.

The North Dakota bonds will be used to refinance a portion of acquisition costs from Dakota Clinic, Dakota Specialty Institute and Medical Properties. The Wisconsin bonds will be used to equip and improve Essentia's facilities and refund a portion of 1999B Wisconsin Health and Education Facilities Authority bonds and the Minnesota bonds will be used to refund 1999B Duluth Economic Development Authority healthcare revenue bonds.

Orlando prices $87.27 million bonds

In other pricing news, Orlando, Fla., on Monday priced the last of three planned bond sales.

The city priced $87.27 million bonds with a 6.265% true interest cost.

The series 2008C third lien subordinate tourist development tax revenue term bond (Aa3/AA+/AA-) priced as a 5.5% coupon with a 5.85% yield on the 10-year call, according to the final pricing sheet.

The 3-year call priced with a 5.75% coupon with a 5.9% yield.

The term bonds are due 2038.

The bonds were sold in a negotiated sale managed by Goldman, Sachs & Co.

The city's bonds that priced Thursday also were readjusted because of Monday's sale, said Chris McCullion, assistant treasurer for Orlando.

The pricings were recalculated as $190.25 million series 2008A bonds and $33.365 million series 2008B bonds.

Goldman, Sachs & Co. is the manager of series 2008B and 2008C bonds, and Citi is the manager of series 2008A bonds.

Proceeds will be used to construct a $480 million community event center in Orlando.

Pennsylvania to takes bids

Moving to upcoming offerings, the Commonwealth Financing Authority of Pennsylvania plans to price $187.5 million fixed-rate bonds in a competitive sale on Tuesday, a source said Monday.

The series 2008A federally taxable revenue bonds (A1/AA-) mature 2009 through 2027.

Proceeds will be used for economic development-related grants and loans to public and private entities.

Roanoke brings $58.6 million insured bonds

Also coming up is $58.6 million in lease revenue bonds from the Economic Development Authority of Roanoke County, Va. on March 20.

Moody's Investors Service assigned an A1 rating Monday to the bonds.

The bonds will be insured by Assured Guaranty.

Proceeds will be pooled with $11.2 million of county funds to construct a recreation facility, library, public works garage and fire station and purchase police radio equipment.

Additional comment was not immediately available.

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