Thursday, February 17, 2011

Bad bonds, bad bonds, watcha gonna do

So I saw the notice that some Port Authorty debt was being rated and didn't think much of it.. Of course, the way this works is that new debt ratings like that don't normally happen spontaneously, but reflect some new debt offering or other big change.  So it comes as no big surprise that the Port Authority is paying a big penalty to get out from some variable rate debt

$39 million bucks... I wonder what it would have cost if they dealt with it earlier?    No biggie. 

Something I should have caught...  or maybe I did?  I think it is the same debt mentioned here in 2008.  If it is the same debt, then the story today is far less interesting than it could have been.  There is, or was, at least the theoretical possibility of foreclosure on some "T" cars somewhere woven in there.  I have this image in my head of the cars being loaded onto barges for shipment down river and then shipped to Belgium or something.

I also don't get the line about this debt becoming "unpredictable" and thus the reason they had to shell out nearly 40 mil.  I think there are innumerable ways to hedge a debt instrument to make your budgeting less volatile.  Makes no sense as transcribed.  They basically chose to borrow in a highly risky way and chose not to hedge it in any way. 

Alas...  water under the bridge and I like the general theme that this was all just a problem others have gotten into.  No, many many places never got into these binds.  But let's ask the rhetorical question again and ponder what other variable rate, auction rate or 'swaption' debt is still out there looming ready to hit someone's bottom line.  Say large public agencies with big debt outstanding.  Some others with letters of credit about to expire?



Anonymous Ken Zapinski said...

The most important line in the PG story on the transaction:

"The authority agreed to the swaption deal with Merrill Lynch in 2004, during the administration of CEO Paul Skoutelas."

Part of reform is cleaning up after poor decisions made in the past. That's a good thing, not a bad thing.

Thursday, February 17, 2011 10:55:00 AM  
Blogger C. Briem said...

Would have been a lot cheaper to fix several years ago.. interest rates were a lot lower.

Thursday, February 17, 2011 11:00:00 AM  
Anonymous MH said...

Reminds me of the old joke.

Thursday, February 17, 2011 11:38:00 AM  
Anonymous Anonymous said...

It's not as if nobody knew about the 'swaption'. The Board talked about it a lot during the Skoutelas years. They seemed to know PAT was playing the market and was exposed, but they also seemed to be extremely pleased with the results (then). Who knew???


Thursday, November 03, 2011 12:03:00 AM  
Blogger C. Briem said...

Having worked as a very young guy on the derivatives trading floor at Lehman, I suspect I could give an answer to that... but since this post is from 9 months ago it is not really worth it.

but it was not all firms that were pushing these products on public sector clients.

Thursday, November 03, 2011 7:37:00 AM  

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