Nearly 1b County Borrowed Faces Escalating Rates
Written by Lou Ortiz on March 6, 2008
By Lou Ortiz
With nearly $1 billion of debt in unstable markets, Miami-Dade County is trying to avoid the prospect of interest rate hikes of 100% or more that could require untallied millions in additional debt-service dollars over the life of the loans.
The crisis in auction-rate securities and commercial paper markets already has doubled the county’s interest on some loans from 8.5% to 11% in the auction-rate market.
The crisis is being driven, in part, by tight credit and failure by the markets to draw investors because of concerns over the insurers that back the government loans, according to media reports.
The county commission Tuesday agreed to a resolution that allows the administration to tackle the problems without having to come back to commissioners for approval.
Finance Director Rachel Baum told commissioners Tuesday that her office is trying to get interest rates on some debt instruments down to 3% or lower.
The problems began about two weeks ago in the auction-rate securities market where $136 million in county Aviation Department bonds failed to attract investors.
Last week, the county revealed that an additional $74,575,000 in Aviation Department bonds in the auction-rate market could face similar interest rate hikes, along with $579,670,747 in loans to the Port of Miami in the commercial papermarket.
"Recently some of these commercial paper notes have failed to sell and have been tendered to the bank at 6% interest rate, far above the rate prior to the crisis," county documents state. "This means that the county is paying a much higher interest expense than originally estimated."
Governments use the commercial paper market as a low cost way to finance debt, involving short-term, variable rate instruments that are tax-exempt and mature in one to 270 days. The interest rate depends on the market conditions on the day of sale, according to the Florida League of Cities.
The county obtained the loans for the seaport through the State Governmental Financing Commission. Six of the loans are insured through CIFG Guaranty and four through Ambac.
Moody’s Investors Service placed CIFG’s AAA rating on review last week for possible downgrade, according to the Associated Press.
During the same week, however, Standard & Poor’s affirmed Ambac’s AAA rating, the Associate Press reported. But S&P left the firm on CreditWatch, with the possibility of a future downgrade.
The county’s plans for the commercial paper loans include seeking a line of credit letter support, switching to other insurers, or transferring the loans to a bank, county documents show.
The county plans to switch $210,575,000 in auction-rate securities to either fixed-rate bonds, a variable-rate instrument supported by a line of credit, or a bank loan to avoid the upwards of 13% from 3% that Miami-Dade faces in the market.
The market auctions municipal and corporate bonds and preferred stocks. Interest rates are set every 7, 14, 28 or 35 days, by short-term investors who bid and purchase the bonds.
Municipalities are attracted to the market because interest rates are usually lower than fixed- rate borrowing.
Ambac is the insurer on the auction-rate securities. Before Standard & Poor’s action, $17,450,000 of the $210,575,000 in bonds was remarketed at 11% interest, county documents show.
Still unknown is what the county will pay in annual debt service on the bonds and commercial paper.