Louisiana moves forward with coronavirus-delayed variable-rate refinancing

Bonds

The Louisiana State Bond Commission will move forward with a variable-rate refinancing that was delayed earlier this year due to market disruption caused by the onslaught of the coronavirus pandemic.

The bond commission decided Thursday that $424 million of variable-rate bonds will be refinanced with short-term debt.

Using short-term paper provides the state with flexibility due to the fact that the bonds are hedged with six swaps indexed to Libor.

The swaps aren’t expected to be terminated in the refinancing because they are underwater at an “all time high right now” due to low interest rates, said Bond Commission Director Lela Folse, who explained to the panel that as rates go down swap valuations go up.

“On the swaps, the recommendation is to do nothing right now as it’s just too expensive,” she told the board.

The swaps associated with the variable-rate bonds were underwater by a combined $177.1 million as of Dec. 31, 2019, according to the most recent information available in the 2019 Net State Tax Supported Debt Report.

Counterparties to the swaps, which have different termination dates, are Bank of New York, Raymond James, and JPMorgan.

Each of the hedging agreements are based on one month of the London Interbank Offered Rate, the current benchmark for short-term interest rates that’s expected to transition to the Secured Overnight Financing Rate on Jan. 1, 2022.

Folse said a “simplified” approach to refinancing the $424 million in two different structures is expected to save the state $755,000 more than the deal that was planned before the market was disrupted by measures to stem the coronavirus that causes COVID-19.

About $303 million of bonds will be refinanced with a three-year maturity “to get through the Libor transition” and give the markets time to adjust to new rates, she said, and $121 million of bonds will mature in two years because the debt has two associated swaps that will terminate in May 2022.

“The bottom line is we’re working to save some money,” said state Treasurer John Schroder, chairman of the bond commission.

The variable-rate debt being refinanced is part of the state’s gasoline and fuel tax revenue bond program for which about $2.5 billion is outstanding. Bonds financed projects in the Transportation Infrastructure Model for Economic Development, or TIMED program.

“The bottom line is we’re working to save some money,” said state Treasurer John Schroder.

A total of $2.17 billion of first-lien new money gasoline and fuels tax bonds were issued from 1990 to 2006 for the TIMED projects, while $879.32 million of second-lien bonds were issued from 2008 to 2010.

The first lien-bonds were issued as fixed-rate debt, while second-lien bonds were issued as variable-rate debt with multiple interest rate swap agreements, according to the 2019 debt report.

Four series of second-lien bonds totaling $485 million were issued in 2009 with forward starting interest rate swap agreements that were extended to the delivery dates of each bond series.

Folse said the upcoming refinancing is expected to take place the week of Nov. 16 in order to comply with the Dec. 1 mandatory tender date.

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