Responding
to the changing Interest Rate Market, the EID Board of Directors moved to save ratepayers $3 million annually and $75 million in savings over the 25-year life of the bonds. "Saving $3 million a year is a good thing," director Harry Norris said.
Board members stressed that the interest rate increases had nothing to do with the district's financial soundness or its bond rating, but rather with problems related to the subprime mortgage crisis, but unrelated to EID's finances.
Doug Dove of Bartle Wells Associates, the district's financial adviser, said: "I fully support this conversion. It's about saving the ratepayers money."
El Dorado Irrigation District directors have moved to convert about $100 million in adjustable-rate bonds to avoid rising interest rates spawned by the subprime mortgage crisis.
Board members stressed that the interest rate increases had nothing to do with the district's financial soundness or its bond rating, but rather with problems encountered by the bond insurer, Financial Guaranty Insurance Co.
The company was among bond insurance firms that provided coverage for collateralized debt obligations that included subprime mortgages. When the mortgages failed, the bond insurers had to pay, and their capital fell to what rating agencies considered unacceptable levels.
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The Irrigation District board voted unanimously Monday to convert the auction-rate securities issued in 2003 and 2004 to variable-rate demand obligations.
Although both types of securities have adjustable interest rates, variable rate demand obligations are supported by a letter of credit from a bank rather than bond insurance, according to a staff report.
Board President George Osborne said some people in the community think the district should convert all its bonds to fixed-rate securities. He asked what the rationale was for switching from one form of adjustable-rate security to another.
"We save $3 million annually if we go to variable rate vs. fixed rate," said Phil Knapik, district finance director.
That amounts to $75 million in savings over the 25-year life of the bonds, he said.
Knapik said the district saved $6 million in interest payments over the past five years by using auction-rate instead of fixed-rate securities. Interest rates on the auction-rate bonds began to rise in January because of the bond insurer's financial problems.
"Saving $3 million a year is a good thing," director Harry Norris said. "But what happens if the interest rate goes up? Can we get stung again?"
Dave Houston of Citigroup Global Markets, the district's bond underwriting firm, said the district would not be exempt from risk. But it has a reserve that is earning interest, he said, and increased interest income would help offset interest rate increases on the bonds.
"We're matching your assets and liabilities," Houston said.
The letter of credit will be issued by the French bank Dexia, which owns a bond insurance firm that has not been caught in the subprime market meltdown, Houston said.
The El Dorado Irrigation District is one of numerous agencies and municipalities in California that used auction-rate bonds. It issued $91.8 million in 2003 and nearly $8.3 million in 2004 to finance capital improvements to its water, wastewater and recycled water systems.
Doug Dove of Bartle Wells Associates, the district's financial adviser, said: "I fully support this conversion. It's about saving the ratepayers money."
To meet its bond obligations, the district must maintain at least a 1.25 debt service ratio, meaning total revenues must exceed operating expenditures, including debt payments, by 125 percent.
Knapik said the district's debt service coverage isn't expected to drop below 1.3 for the five-year period of 2008-2012.
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