March 21 (Bloomberg) -- Municipal borrowers from Wisconsin to California plan to pull at least $21 billion of bonds out of the auction-rate market by May 1 to escape soaring costs, according to data compiled by Bloomberg.

The amount is more than what was sold in any one year before 2002, the data show. About 69 percent of auctions in a market that also includes debt of student lenders and closed-end mutual funds failed to attract enough buyers this week, resulting in interest rates as high as 14 percent. Rates are determined through a bidding process managed by banks typically every 7, 28 or 35 days.

Borrowers are converting to fixed-rate bonds and other forms of variable-rate securities, after investors pulled back from debt backed by downgraded insurers and dealers stopped acting as buyers of last resort. Yields on municipal auction debt are almost twice what they were in January on average, based on a Securities Industry and Financial Markets Association index.

``The issuers couldn't pay those punitive auction rates and remain solvent after the market effectively shut down,'' said Mike Pietronico, chief executive officer of Miller Tabak Asset Management, a municipal-bond investment advisory unit at New York-based trading firm Miller Tabak & Co.

The average rate on long-term bonds with rates determined at auctions every seven days was 6.41 percent March 12, based on the latest public data from Sifma. That's down from a record 6.89 percent in February, though still higher than every other reading in the two-year-old index that averaged 3.60 percent through January of this year.

Sales Explosion

The use of auction bonds by states, cities and other municipal borrowers exploded in 2002, when sales doubled to $25 billion from $12 billion the previous year, data compiled by Thomson Financial show. Sales peaked at $42 billion in 2004 before subsiding to $39 billion in 2007.

The $21 billion total represents auction bonds to be called, or bought back, on dates from February through the first day of May, according to data compiled by Bloomberg from an original list of $211 billion of the debt.

The auction market attracted borrowers by offering financing for 20 years or more at variable rates determined through periodic bidding without the need for letters of credit.

While not obligated to do so, bond underwriters from UBS AG to Goldman Sachs Group Inc. to Citigroup Inc. would commit their own capital to prevent auctions from failing when too many people wanted to sell and not enough buyers showed up. From the market's creation in 1984 through 2007, there were less than 50 recorded failures, Moody's Investors Service said.

Failures Surge

Beginning Feb. 13, auction failures numbered in the hundreds each day. Since then, 60 percent or more of public auctions have been unsuccessful, based on data compiled by Bloomberg from four auction agents: Deutsche Bank AG, Wilmington Trust Corp., Bank of New York Mellon Corp. and Wells Fargo & Co.

At failed auctions, the rates borrowers continue paying revert to a set level of 10 percent or more, or one based upon money-market benchmarks, which have fallen as the Federal Reserve cut interest rates.

Securities with lower failure reset rates, such as closed- end funds' preferred shares and a $250 million deal by Philadelphia, have been failing in greater proportions as investors seek out the juicier potential returns on bonds with higher penalty rates.

``The tactical participants will only participate as long as the yield advantage is significant,'' New York-based investment firm Samson Capital Advisors LLC said in a March 7 commentary.

Getting Out

Philadelphia plans to get final authorization next week to sell fixed-rate bonds in mid-April to replace auction bonds that have been failing, said Rob Dubow, city finance director.

Rates on almost $100 million of Philadelphia's 2003 debt, insured by downgraded XL Capital Assurance Inc., rose to 5.35 percent from 3.75 percent in October.

``In some ways, we were lucky: there were places with resets and failures much higher than ours,'' Dubow said.

Wisconsin this week sold about $800 million of bonds to replace some of the state's taxable auction debt that rose in cost to as much as 14 percent this month. Besides fixed-rate bonds, the state also sold securities paying 1.2 percentage points more than the one-month London interbank offered rate, or 3.81 percent based on yesterday's rate.

The U.S. Securities and Exchange Commission on March 14 allowed nonprofit hospitals and other borrowers to bid on their own auction-rate bonds as an alternative to stemming failures.

The Reading Hospital and Medical Center in Reading, Pennsylvania, notified investors of plans to bid March 19 for $40 million of its debt, after having to pay 11 percent after Feb. 13's auction. The winning rate was 3.75 percent, beating out ones that ranged from 5 percent to 11.3 percent, bidding results disclosed by the hospital show.

To contact the reporter on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net.

Last Updated: March 21, 2008 00:01 EDT