RSS Redding to pay $6.7 million dollars in bond fees
By Doni Greenberg • May 9th, 2008 • Category: THOUGHT: What's on Doni's mind
Redding Electric Utility is mentioned in today’s Bloomberg.com story.
Here are excerpts:
Taxpayers from Massachusetts to California are paying Wall Street banks to end derivative contracts gone bad as they exit the collapsing auction-rate bond market, with penalties in some cases topping $10 million and compounding the pain of rising borrowing costs. …
… Redding, California, expects to pay Citigroup $6.7 million to close out a swap on $67.3 million of auction-rate bonds it sold, said Tom Graves, financial manager of the city’s electric system, the recipient of the proceeds.
It refinanced the bonds on April 28, selling fixed-rate debt because it was concerned variable rates in the municipal market might shoot up again, he said. Danielle Romero-Apsilos, a spokeswoman for Citigroup, declined to comment.
“It was a very good alternative while it worked,” Graves said in reference to the use of auction bonds combined with fixed-rate swaps. “Our feeling was that there was still uncertainty in the marketplace that hadn’t been resolved.”
To read the entire story click here.
For the record, the RS reported this on March 18, 2008:
http://www.redding.com/news/2008/Mar/18/turbine-costs-could-yield-rate-increase/
The auction rate securities SWAP termination payment at that time was pegged at $7.5 million. The payment was part of the $185 million in bonds REU sold recently to refinance debt and pay for another natural gas turbine at the Redding Power Plant (Unit 6).
Could someone explain this in simpler terms? I can’t figure out what happened.
So what is the City doing about this…and why is there so little coverage on this, Scott. With all that is in the paper this morning, with the county being turned down for jail funds, increases in the retirement plans for many of the City employees, development fees being reduced, although our building permits are at an all time low, and the City taking set aside Park development and maintenance funds (no longer grass on fields, just dirt, for no money to maintain the lawns)….what is going on?
I think we have some issues that a whole bunch of us need to get involved with and start paying attention to our government “leaders”. Both Redding and Shasta County is going to go broke, as Vallejo has just done, if we don’t pay attention.
Thanks,
Ron Largent
Here, here, Ron…
Scott, with all due respect, your story in March was good but the story continues to unfold, both locally and nationally and the RS has not kept up.
Thanks for the link, Scott. That story added some context to the issue, even if the focus, and the numbers were a bit different. The RS story included:
The Bloomberg article said
and
Both stories left me a little foggy on whether we thought we were getting the LIBOR rate, or understood that we were getting something that acted like the LIBOR in the past. I believe the City of Redding utilities folks have done a great job in keeping our utility rates low, but I wonder if we’ve been misled by folks with divergent interests. Maybe I’m that suspicious because of another article I read today, relating to collusion amongst some major financial institutions, which allegedly swindled Oakland on rates thay gave on unused portions of bond funds. See http://www.bizjournals.com/eastbay/stories/2008/04/21/daily69.html?jst=b_ln_hl
if interested.
And then I read on Bloomberg that:
Perhaps as Bruce Greenberg suggested, the Searchlight could do more to help us make sense of this.
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Sorry, but I really am not understanding what the impact will be on us, consumers of REU. Could someone p-l-e-a-s-e explain for us laymen?
Thanks in advance :^)
From my limited understanding, the utility basically paid a 10% fee to switch from a variable rate (which had historically been low, but was climbing) to a fixed rate of 6%.
I would need to break out the trusty spreadsheet to see how high interest rates would need to climb to truly justify paying such a steep penalty, but overall it seems like an overly cautious action that is likely to pay off only if interest rates stay high for a long period of time.
The net result is that the city is forced to come up with ~7 million dollars now (either by taking the money from other projects or going further into debt) in order to ensure that they will be able to stay on top of their future payments.
Linda,
One way to look at it, would be to say that the average REU customer will pay about $78 for the termination payment ($6,700,000/86,000 customers).
Thanks Jeff for explaining this in terms that helps me understand what happened.
Mr. Mobley, I did read the Record Searchlight article and did not get the correct information or focus from the article that mostly discussed the purchase of a turbine.
Perhaps, if half as much time was spent trying to inform readers about this issue, as spent repeatedly revisiting the ’sex scandal’ ( where clearly the employees were dealt with quickly and appropriately) your readers would have more faith that they are being kept informed of important city hall actions.
I don’t know if this was a good decision or not. However, I do feel like it was buried in the Record Searchlight article much like some unpopular legislation is buried in bills to get them passed.
One thing to note on the 86,000 REU customer figure — that includes business (so business owners get to foot the bill twice)
Here’s some additional reporting from Forbes, from the perspective of the buyers of the auction-rate securities:
Auction-Rate Securities - A Really, Truly Terrible Investment
There are bad investments, and then there are really, really bad investments.
.. When the credit markets seized up, investors started shying away from fixed income, and the investment banks that cooked up the products and sold them to investors refused to step in and buy, allowing those auctions to fail. That left investors unable to sell their holdings.
It was an unhappy circumstance for the issuers, too. According to the terms of the bonds, the interest rates would reset at much higher penalty rates in the event of an auction failure, then fluctuate in subsequent auctions.
For many, the higher penalty rates (for the Port Authority, rates reset to 20% from 4% after a failed auction in February), threatened to derail infrastructure projects, and many issuers have refinanced into more traditional fixed-rate bonds.
…
Eleven states, the Securities and Exchange Commission, and the New York Attorney General’s Office are investigating how investment banks marketed and sold auction-rate securities. Hundreds of complaints have poured in to state regulators.
…
The solution may be that regulators force the banks to return the money to investors, which is why the task force is looking into how the products were presented and sold. “If it was represented that they were as good as cash, then investment banks need to pay cash for them,” Tyler said. “The investment banks need to make the liquidity event happen.”
the full article can be found at:
http://www.forbes.com/2008/05/08/auction-rate-bonds-biz-wall-cx_lm_0508auctionrate.html?feed=rss_popstories