Wednesday, September 30, 2009

those SEA bonds again

Hey look.. Trib catches the story that the state is having to cover the costs of the variable rate bonds the SEA used for the arena bonds:  State to give Pittsburgh hockey arena $5 million assist on bonds

Unasked question... why didn't the SEA's swap work.  It was supposed to hedge against interest rate variability.  Too technical a point to get into for a news story like that, but someone really needs to ask that. I'll add that I am assuming the Trib had to dig for that story.  I don't see any other coverage of this, which would imply this wasn't just put out in a PR of some kind.. you have to believe this would be news all around if known about. 

Who said that this was probably a problem?  Actually who warned this was all coming over a year ago.  Sigh.

Anyway, here is chart I put together in that previous post on how the interest rate on the SEA bonds went over the last year.  Funny how we are only now learning about the costs of that. The story says the SEA "notified the state about the shortfall in December".  Last December? 

What really is odd here is a) why the bond needed bond insurance in the first place if it was indeed backed by the commonwealth.. and b) if the state is backing up the bond then why did interest rates spike when the bond insuerer lost its own credit rating.  It just seems to me that this was all structured in a way to obscure the state's backing of the bond with the result being a lot of extra costs.  It's as if the SEA paid for protection it didn't need yet didn't benefit from the protection it had.  In the end it lost both ways.

and looky:  The Pittsburgh Water and Sewer Authority is floating $145 million.  Not a big surprise, but you would think that is a bit of news since it is all money being spent to get out of the last bond issuance that went bad. 

update 2:  or maybe not.  Even though the above linked article clearly says "Pittsburgh Water and Sewer Authority Hitting Market with $145.5 Million New Issue" I am told that isn't the case.  Very odd.  Someone just made that up.  Nonetheless, there seems to be no disputing the Moody's analysis of the PWSA's situation which is pretty harsh.  Again from the link above: 
The underlying Baa1 rating reflects the authority's weak legal provisions, highly leveraged system (debt ratio 109%), and low debt service coverage levels averaging 1.2 times on all debt service payments. The rating also incorporates the authority's large, diverse, and stable customer base. The negative outlook reflects the risks related to the authority's debt structure in light of narrow coverage levels. These risks include: interest rate risk from its 50% variable rate demand bonds that are all swapped to fixed as evidenced by the higher interest costs experienced in the last year given market disruptions; the rollover risk associated with its liquidity providers, demonstrated by the authority's inability to obtain credit support for half ($26 million) of its subordinate 2008 C-1 bonds renewing on October 11, 2009; and counterparty concentration risk, given that all of the authority's surety bonds, swap insurance policies, and the majority of their variable and fixed rate bond insurance policies are provided by Financial Security Assurance, Inc. (FSA - insurance financial strength rated Aa3/under review for possible downgrade).  (emphasis added)


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