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Muni issuers plan to bid on own bonds

In auctions that start this week, they aim to get debt out of the market or lower rates.

April 03, 2008|From Reuters

Reassured they will not break federal securities regulations, issuers of auction-rate bonds will bid to buy back more than $2.12 billion of the debt securities starting this week, according to a survey of disclosure notices Wednesday.

Along with other municipal bond issuers, groups intending to bid include the Los Angeles County Museum of Art, Puerto Rico and hospitals in various states, according to documents released by Digital Assurance Certification and DPC Data, two municipal bond information repositories.

Most will determine the interest rate they will bid using the municipal swap index rate of the Securities Industry and Financial Markets Assn. (SIFMA). Others are setting a floor for the interest rates, such as "not less than 3.70%."

Florida's Citizens Property Insurance Corp. intends to bid on $375 million in bonds Friday, the most out of all the issuers so far. It plans to submit bids in auctions at the one-month London interbank offered rate plus 1 percentage point.

Auction-rate securities -- long-term bonds with interest rates that reset periodically at auction -- have become one of the casualties of the country's liquidity and credit crunches. Firms stopped bidding on the bonds earlier this year and, after the auctions failed, the bonds' interest rates defaulted to maximum levels.

Even when auctions attracted bids, issuers faced unexpectedly high interest rates demanded by investors.

Earlier this year, issuers asked regulators if they could bid on their own securities in order to whisk them out of the market or decrease interest rates.

At the end of March, the Securities and Exchange Commission and the Treasury Department said they could do so without running afoul of market regulations.

Puerto Rico, which will bid on $50 million of bonds on April 8, plans to offer interest rates of 2.75% or the SIFMA index, whichever is higher. In its notice, the U.S. territory had to pay a much higher rate of 5.63% because of an auction Tuesday in which it did not participate.

The SIFMA swap index is a short-term gauge of activity in the variable-rate bond market that is posted weekly. In the last year it has not risen above 4%, which should help some of the issuers attain a lower rate. As of March 26, the index stood at 2.21%.

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