Louisiana, one of the poorest U.S. states, may move to pay a $95 million penalty to refinance debt taken on to renovate the Mercedes-Benz Superdome, home of the National Football League’s New Orleans Saints.
The State Bond Commission will weigh a request this week from the agency that owns the Superdome for initial approval to refinance $294 million of securities. The deal would trigger the penalty to unwind related interest-rate swap agreements with Bank of America Corp., which would get the payment.
The refinancing would be done through a negotiated transaction with the bank’s Merrill Lynch unit, according to documents from the Louisiana Stadium and Exposition District, which sold the debt in 2006. Merrill Lynch handled that sale through the now-moribund auction-rate securities market, and the swap agreements. If a deal is authorized, Whit Kling, the agency’s director, said it would end an unusual situation.
“This has been a sore subject for some time,” Kling said Oct. 12 by telephone. “None of the parties is going to get 100 percent satisfaction.”
The agency has requested authority to sell as much as $450 million of bonds through one of four proposed options it is asking the board to look at, Kling said.
“Each of the methods will end up with a different result,” he said.
The four proposed refinancing methods, which involve various combinations of fixed and variable-rate debt, each have costs as well as advantages and disadvantages for the parties involved, including the state and the district, Kling said. The initial borrowing raised money to pay for renovating and repairing the stadium following Hurricane Katrina in 2005.
Louisiana had to buy the bonds as an investment after the auction-rate securities market froze in early 2008, saving the district from paying interest rates as high as 18 percent, Kling said. While the state has held it, the debt, which is offered for resale every week or month, has been resetting at yields of 1.25 percent, he said, saving money on interest that the state would ultimately be responsible for.
The market collapsed when securities dealers that handled the periodic auctions stopped acting as buyers-of-last-resort to acquire bonds that investors no longer wanted.
The dealers provided liquidity, keeping the market afloat before withdrawing support as the crisis that began in the residential-mortgage market spread in early 2008. That forced many issuers to refinance debt or face penalty rates.
The U.S. Internal Revenue Service let Louisiana take on what was essentially its own debt -- an unusual arrangement -- and told state officials to come up with a refinancing plan this year or hold the securities to maturity in 2036, Kling said.
About 18 percent of Louisiana’s population lives in poverty, compared with 14 percent nationwide, according to U.S. Census Bureau data.
Federal law doesn’t permit an issuer to buy its own bonds. The IRS made exceptions after the auction-rate market’s collapse. The state is required to pay fees to the IRS, and would use part of the refinancing proceeds to pay some fees, according to filings with the commission.
Eric Eagan, a spokesman for the Superdome, declined to comment.
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