New Jersey?s Economic Development Authority plans to issue as much as $2 billion of bonds early next month to refinance school-construction debt and terminate $1.7 billion of interest-rate swaps.
The agency will pay an estimated $296 million to end the swaps, which it entered into beginning in 2003. The refinancing will save the state about $278 million in debt payments, which will cover all except $18 million of the termination fees, said Andrew Pratt, a spokesman for state Treasurer Andrew Sidamon- Eristoff.
The transaction also will allow the state to reduce its risk as it projects higher costs next year for letter-of-credit- backed agreements amid new financial regulations, Pratt said. It?s unclear how much the rules, which require banks to set aside money to back such borrowing, may raise the state?s costs, he said.
?There?s going to be a lot of demand and fewer suppliers,? Pratt said. ?It will be a tremendous reduction in our risk.?
Derivatives known as swaps, in which two parties agree to exchange payments based on underlying assets or indexes, were sold to states and local governments as a way of saving taxpayers money. The agreements backfired after the financial crisis, leaving the buyers with soaring interest bills. The trades have since cost public agencies and nonprofits more than $4 billion in fees to back out of them, according to data compiled by Bloomberg.
?This prudent transaction marks the beginning of the end of New Jersey?s foray into exotic financial engineering,? Sidamon-Eristoff said in a statement. ?It will save our taxpayers more than $18 million by cleaning up our books and eliminating much of our open-ended legacy exposure to complicated and risky derivatives agreements.?
Variable-Rate Debt
As a result of the bond issue, $1.5 billion, or 84 percent, of the Economic Development Authority?s variable-rate demand bond portfolio will convert to fixed-rate, Standard & Poor?s said in a report this week. The transaction also will terminate 57 percent of the agency?s swaps, reducing the so-called mark- to-market position of its portfolio to negative $288 million from negative $584 million, S&P said.
The sale also will eliminate the agency?s need for letters of credit in fiscal 2011 and 2012, and reduce the state?s total need for such borrowing by 41 percent, according to S&P said.
The amount of swaps to be terminated may change depending on market conditions, Pratt said.
To contact the reporter on this story: Terrence Dopp in Trenton, New Jersey, at tdopp@bloomberg.net.
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.
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