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NEW YORK—Interest
rates on $100 million of bonds issued by the Port
Authority of New York and New Jersey were set at 8
percent in a weekly auction run by Goldman Sachs Group
Inc. after surging to 20 percent on February 12.
Rates
had soared from 4.3 percent when too few buyers bid for
the so-called auction-rate debt and Goldman refused to
put up its own capital to buy unwanted securities,
causing the yield to be set at a level predetermined in
bond documents. Rates fell Tuesday as the prospect of
high yields enticed investors, according to data
compiled by Bloomberg.
Rates in
the more than $300 billion market for auction-rate debt
are rising nationwide after banks including Citigroup
Inc. and Goldman stopped bidding for the debt at
periodic sales they oversee, prompting hundreds of
so-called failures. Some investors, including
OppenheimerFunds Inc., see an opportunity in the turmoil
and are buying the bonds.
“Twenty
percent was such an unusually high number,” said Judy
Wesalo Temel, director of credit research at Samson
Capital Advisors Llc., a fixed-income manager in New
York. “I wouldn’t say that the whole market has calmed
down or has even begun to function normally yet. It
hasn’t.”
The
8-percent rate on the federally taxable Port Authority
debt is still above the range of 4 percent to 5.7
percent that it paid until this month. Port Authority
Treasurer Anne Marie Mulligan didn’t immediately return
a call for comment, while Goldman spokesman Michael
DuVally declined to comment.
Auction-rate bonds are long-term debt with interest
rates that reset according to bids submitted through
securities firms every seven, 28 or 35 days. When there
aren’t enough bids, the auction fails and the rate is
set at a level spelled out in bond documents. Investors
who expected to sell the debt are left holding the
securities.
Until
the past two weeks, bankers who ran auctions prevented
failures by purchasing bonds for their own account,
though they weren’t required to do so. Investors grew
wary of relying on bankers to support auctions as the
investment firms reported more than $146 billion of
losses and writedowns.
The
average rate for seven-day municipal auction bonds rose
to a record 6.59 percent on February 13 from 4.03
percent the previous week, according to indexes compiled
by the Securities Industry and Financial Markets
Association.
Regulators allow dealers to bid when they choose and to
control auction information as long as they disclose
that they might submit bids. Bankers don’t have to say
how often they buy or how much, and aren’t required to
make public the range of bids or when auctions fail.
Last
week, New York Gov. Eliot Spitzer cited the high rate on
the Port Authority’s auction-rate bonds in testimony on
bond insurers at a House subcommittee on Capital
Markets, Insurance and Government hearing. Insurers such
as MBIA Inc. and Ambac Financial Group Inc. that back
the debt are struggling to raise capital after taking
more than $8 billion in writedowns related to
mortgage-linked securities they guaranteed.
“The
higher max-rate stuff is starting to get some traction,”
said Matt Dalton, chief executive officer of Belle Haven
Investments, a money-management firm based in Greenwich,
Connecticut.
Drivers
on the Massachusetts Turnpike may face higher tolls
after the state was unable to sell auction-rate
securities backed by a unit of Ambac, according to state
officials. The turnpike is now trying to buy a letter of
credit from State Street Bank and Trust Co. and KBC
Group NV so it can sell variable-rate demand obligations
by mid-March instead of auction-rate securities, an
advisor for the Turnpike told the agency’s board
Tuesday.
“That is
a very significant financial obligation, probably our
biggest short-term problem,” Alan LeBovidge, the
turnpike authority’s executive director, said at the
state agency’s monthly board meeting Tuesday.
The
Alexandria, Virginia-based Municipal Securities
Rulemaking Board (MSRB) said yesterday that it is
reminding dealers of rules on disclosure to investors
and on suitability requirements, which make dealers
responsible for ensuring investors understand the
securities they are buying.
“The
notice was put out to remind dealers of their
investor-protection obligation under MSRB rules,”
executive director Lynnette Hotchkiss said in an
interview with Bloomberg Television. The board makes the
rules for the $2.6-trillion market of debt sold by
states and municipalities.
Also
Tuesday the US Internal Revenue Service (IRS) said it
plans to issue new rules making it easier for local
governments to convert high-rate auction bonds to
lower-cost debt.
The
changes wouldn’t be such a significant modification that
it would amount to a re-issuance of the bonds, the IRS
said. Many auction securities were sold with the option
of converting them to variable-rate demand bonds, or a
debt with a fixed rate.
If the
conversion was considered a re-issuance in the eyes of
the tax authorities, it might result in “various
negative consequences to a bond issuer,” including lower
limits on interest earned from investment of bond
proceeds, termination of interest-rate swaps or
public-approval requirements for some kinds of bonds,
the IRS notice said. (Bloomberg) |
