Though the financial crisis has managed to gut some practice areas—venture capital, anyone?—it’s proving a boon to others.
One beneficiary is bond work created when cash-strapped banks decide not to renew letters of credit. That’s the situation that pushed the Atlanta City Council on Monday to adopt a Series 2009 bond ordinance for funds not to exceed $750 million. A portion of that money will be used to refinance commercial paper issued for the city’s water and sewer department.
“That’s an example,” says Earle R. Taylor III, a partner in Kilpatrick Stockton’s public finance practice and counsel for the city on this deal. “The financial crisis has really been the majority of what I’ve worked on in the past year.”
He explains that three primary situations resulting from the credit crisis have boosted the need for refinancings. “It’s either the market for the bonds, in the case of auction-rate paper—the city had some of that—and the market seized up,” he says. “Or you’ve got bonds backed by an insurance company or a bank that gets into financial trouble and gets their credit rating downgraded and investors no longer want them, so the bonds get put back [to the lender]. Or you get a letter of credit that is not renewed or is terminated simply because capital is scarce and banks aren’t interested in providing those products anymore.”
In the case of the city’s water-sewer deal, he says Atlanta’s near junk-bond rating was not a factor in the banks’ decision not to renew their letters of credit. Rather, he says, just the availability and price of credit changed.
The banks which elected not to renew their letters of credit on the city’s water-sewer deal are J.P. Morgan Chase NA; Bank of America NA; Dexia Crédit Local and Lloyds Bank TSB plc.
Taylor says he hopes the bonds, which are slated to be sold in June, will bring in $600 million to $700 million.
Another recession-fueled deal: The city had about $441 million in variable rate demand bonds backed by a liquidity facility from Dexia, a European bank, Taylor says. But the renewal date was Friday, and Dexia elected not to renew. The bonds were set to amortize over 40 years, Taylor says, and if the city can’t get them refinanced, the amortization will shrink to a seven-year term starting in November. A shorter term would mean much higher payments for the city.
He says the city plans to remarket those bonds as long-term, fixed-rate bonds later this summer.
Taylor inked another credit-crisis-related deal because of an insurer’s downgraded rating.
In that deal, municipal bond insurer Ambac Financial Group was AAA rated when it insured the Georgia State University Foundation’s deal to purchase the old SunTrust headquarters at Five Points.
The deal was financed by variable rate demand bonds backed by Ambac, says Taylor, with J.P. Morgan Chase under a standby bond purchase agreement.
“Ambac is now downgraded as junk because of the financial crisis,” Taylor says. “So all those bonds are back at J.P. Morgan and bonds payable over 30 years are now due in five.”
Taylor says he’s in the middle of trying to restructure that $70 million to $80 million deal and get it refinanced. He says he hopes to close in early June.
“These are perfect examples of things we never thought would have happened in a million years, and they’ve happened,” he says. “It’s caused us to look at our documents and contracts in ways we never thought we would.”