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Indianapolis To Restructure Bonds
(posted Jan 30)
The City of Indianapolis must restructure its 2002 F Series Bond or face semi-annual payments of $13 million for the next five years. Market jitters over surety bonds, used to cover debt service reserve funds, have made the bonds "worthless", according to Indianapolis Bond Bank Deputy Director Daron Kintner.
Kintner told the Administration and Finance Committee during its January
13 meeting that the insurance companies providing surety bonds have practically
dried up, with only about two or three firms remaining.
The City County Council approved the restructuring resolution at its January
26 meeting.
The $129 million bonds refunded the original Circle Center Mall bonds.
The restructuring costs could be as high $234 million.
Kintner explained "the market does not take comfort" with the
surety bonds, because the insurance companies could be bankrupt tomorrow.
The market now demands cash to fund debt service.
He said at one point the city was paying as high as 10% interest. The city
is expecting to fund future debt service reserve funds with part of the
bond proceeds, which will require borrowing more than originally planned.
Kintner said the bonds are with a liquidity provider, JP Morgan Chase,
because the market does not want bonds that rely on surety bonds. Although
JP Morgan Chase dropped the interest rate from ten to the five to six percent
range, the city is not about to breathe a sigh of relief. Kintner said
JP Morgan Chase will start an accelerated maturity on July 1, forcing the
bond to be paid off sooner that anticipated. The interest rate changes
every seven days.
The restructuring requires the city to provide a bigger reserve fund to
cover the entire Consolidated Tax Increment Finance area, which was formed
by combining the Harding and Circle City TIFs. The revenue will be generated
from the TIF district .
Councilor Jackie Nytes questioned why very little of the principal was
paid on the $129 million bond over the last six years. Kintner said the
bond provided for interest only payments in the early years. The city entered
into a SWAP agreement that is now "leaking." He does not expect
the bank to terminate the SWAP agreement, but there is a small chance.
A SWAP agreement is a financial mechanism used to hedge against fluctuating
interest rates. The city pays a flat fee to a bank, and the bank pays a
variable rate based on the LIBOR (London Interbank Offered Rate) index. The objective is for the SWAP's fluctuations to match the fluctuations of the bond so the two will cancel each other out.
Kintner said the bank then immediately enters into a transaction opposite
of the city's SWAP agreement with a third party. "They (the banks)
are hedged both ways and they just get the fees."
Kintner expects the restructured bond interest rate to be 4.5% to 5%.
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