Bond deal dead, new one possible

Well, you never know what happens until you try. That old adage includes fighting Jackson's decision to refinance its 2002 and 2004 public works bonds with "interest rate swaps" derivatives that have bankrupted other local governments.

In the original deal, Jackson planned to refinance $95 million in bonds while paying $4 million in fees to various parties (this included $120,000 to Baker Donelson, $60,000 to Anthony Simon, $60,000 to Sarah O'Reilly-Evans, and $476,000 to Sterne Agee plus additional fees to "monitor" the contract to Sterne) for bonds which generated only $1.5 million in fees when originally issued.

However, City Finance Director Rick Hill announced Jackson will only refinance $40 million of bonds using interest rate swaps. The deal fell through because Deutschebank insisted Jackson would have to pay early termination fees if it ever got out of the deal (if it refinanced for example.). Other cities have been burned by these prepayment penalties as they usually cost millions of dollars. The deal was going to be insured by Financial Security Assurance, which proposed Jackson should have five years to pay the fees if termination occurred. The two parties could not agree on this issue so FSA is only going to insure a smaller amount.

Unfortunately, Mr. Hill tried to spin this new refinance as a good deal for Jackson. First he misstated the reasons why these swaps bankrupted Jefferson County:
"Hill said the banks involved in Jefferson County were unable to find anyone to buy the county’s variable-rate debt. He said Jackson has safeguards in place to prevent the same things from happening here. “They went way beyond normal practices,” he said." Northside Sun story

Actually Mr. Hill got it completely wrong. Whether he didn't know the facts or tried to deliberately mislead the reporter is for the reader to decide. The truth is the credit rating for the insurer, Ambanc, for Jefferson County's swap was slashed, causing the interest rate on it's bonds to literally jump overnight from 3% to 10%. There was no problem with selling the bonds as JP Morgan Chase was more than happy to collect ten percent interest and bankrupt the county. In fact, Chase allegedly overcharged JC by over $100 million.

Mr. Hill also says that the fees will only be $2 million. Only. The fees when the original $128 million in bonds were underwritten were $1.5 million dollars. The amount refinanced will be 31% of the original amount yet the fees will be half a million dollars more than what was originally paid. I asked Councilman Weill for a copy of the fees and was told Mr. Hill has not provided the Council with any materials yet showing the structure of the deal and further details about the fees. At this point, we only know there will be $2 million in fees, which is an exorbitant amount.

One other part of the story was wrong: "The agreement would have generated between $10 million and $13 million in upfront cash for the city and would have meant lower payments on bond indebtedness."

There was no upfront cash from the original refinance. Nowhere in the documents provided did it mention Jackson would get any upfront cash. A swap such as this consists of several different cash flows (which is why they are so complicated). Jackson was going to receive a cash flow every year that eventually would have reached a total of $10 million. However, the money was no sure thing, as several factors such as a change in Jackson or another party's credit rating, a change in interest rates, or a default, would have jeapordized the proposed $10 million.

What Jackson should do is suck it up and stick with the fixed interest rate it has now unless it can refinance for a lower fixed rate. It is true Jackson will pay a fixed interest rate in this deal. However, these swaps consist of several transactions and cash flows and those are based on adjustable interest rates. If they move in the wrong direction for any reason, Jackson will pay dearly for what little savings would realize. This deal should be thrown out along with the rest of the Melton administration.

WLBT story
WLBT video

earlier posts:
Stern Agee: Come get your bottle
Sterne Agee's connections
SEC going after JP Morgan for ripping off Jefferson County
Sterne Agee gets more money for "monitoring" swaps
Municipal Carnage caused by Wall Street
Jackson: paying $4 million in fees
Will Jackson end up like Jefferson County?