Desert Utility Settles Case Alleging It Shorchanged Ambac

The water authority of a Southern California desert town will sell $13 million in bonds to settle claims that it shortchanged Ambac Assurance Corp. in terminating an interest-rate swap.

The Adelanto Public Utility Authority, which provides water and sewer service about 85 miles (135 kilometers) northeast of Los Angeles, will pay the New York-based bond insurer $7.8 million under a settlement approved by the city council, sitting as the board of the utility authority.

Ambac, which insured the swap, sued the authority in 2009 saying that it skipped a $6 million termination payment after failing to resolve financial problems that led Minneapolis-based Piper Jaffray Cos. to terminate the contract. A federal judge in Manhattan ruled in Ambac’s favor, and the two sides worked out payment details this year, according to city documents.

“The city is now able to settle 100 percent with Ambac,” City Manager James Hart, who is also the utility authority’s executive director, said by telephone before the 5-0 vote.

The bonds will price this week with the sale closing Dec. 23, Hart said.

Adelanto issued $70.65 million of adjustable-rate bonds in 2005 and purchased an interest-rate swap from Piper Jaffray to help protect against rising rates and to lower borrowing costs. The city also purchased an insurance policy from Ambac guaranteeing payments on the swap.

Adelanto officials didn’t deny that they missed the termination payment. They said Ambac’s own credit problems in 2009 drove up the utility’s borrowing costs, making it unable to afford the payment.

Interest-rate swaps are derivatives contracts sold as hedges.

Hart said the bond payments could be incorporated into the utility’s budget without raising water or sewer rates. In November, voters in the city of 31,300 people rejected utility rate increases that city leaders had called necessary to save the municipality from insolvency.

The case is Ambac Assurance Corp. v. Adelanto Public Utility Authority 09-cv-05087, U.S. District Court, Southern District of New York (Manhattan).