Denver International Airport and the city of Aurora are rushing to refund at least $600 million in bonds as credit problems roiling Wall Street have spread to Colorado and the rest of the country.
DIA and Aurora are refunding the bonds to avoid a potential jump in interest rates to 12 percent or 14 percent from about 3.5 percent on some debt.
“We’re getting hurt because interest rates are going higher than we wanted to pay,” said Karen Feeney, Aurora’s acting debt administrator. “This all has been really heating up in the last two weeks.”
Recently, the market for insured auction-rate bonds — which are rebid every seven, 28 or 35 days — collapsed as investors worried about the financial health of the bond insurers who guaranteed the debt.
Those companies historically backed only safe municipal securities. Recently, the insurers took on subprime mortgage debt and other risky securities.
Exposure to this crumbling sector of the market led credit-rating agencies to downgrade the ratings of some insurers, who are frantically pursuing their own financial bailouts.
On Monday, Standard & Poor’s affirmed its ratings on two big insurers — Ambac Financial Group and MBIA Inc. — though that may not be enough to revive the auction-rate market.
DIA has about $500 million in auction-rate bonds that it plans to refund as fixed-rate securities in the coming weeks, said Margaret Danuser, debt administrator in Denver’s Department of Revenue.
“We are refunding to lower our interest-rate costs,” Danuser said. “We’re not convinced the auction-rate market will come back.”
DIA plans to sell the bonds as uninsured securities, backed by the airport’s credit rating.
Aurora has about $101 million in auction-rate bonds and other insured variable-rate debt that are vulnerable because of the bond-insurance crisis, said city finance director John Gross.
Until the insurers’ exposure to the subprime crisis emerged in recent weeks, bond insurance was prized by cities, airports and other municipal borrowers as a way to tack a AAA rating on the debt and lower interest rates.
“Now it costs us more to have insurance,” Feeney said. “Nothing like this has ever happened before. It’s historically unprecedented.”
DIA saved $60 million
DIA is getting out of the market in insured, auction-rate bonds because it is facing a near quadrupling of weekly interest expense on some debt.
Since 2001, DIA has taken advantage of the frequent rebiddingof auction-rate debt to keep interest rates down, Danuser said.
Those lower rates enabled DIA to save about $60 million over what the airport would have paid if they were fixed-rate bond offerings, she said.
Over the past month or so, as the crisis among bond insurers has spread, the market for auction-rate debt has begun to shrink or even disappear.
If there are no investors bidding to buy auction-rate bonds, it is called a “failed auction,” and the issuer of the debt may end up paying a “maximum” rate.
For $85 million of auction-rate debt issued in 2005, on which DIA has been paying interest of about 3.5 percent, the airport could end up paying a maximum rate of 12 percent, said Bob Gibson, the Denver Revenue Department’s director of financial management.
Such a rise would boost weekly interest payments from about $57,000 to nearly $200,000.
Aurora’s two debt issues
Aurora has two issues of insured, variable-rate debt it is refunding.
One issue includes $60.9 million in variable-rate securities sold in 2006 to cover construction debt on the Aurora Municipal Center. The other is about $40 million in insured, auction-rate city water bonds.
Both suffer from the same problem, Gross said, “the fact that it’s variable debt and the fact that it is insured by one of the companies that is under scrutiny.”
When the auction in the water bonds failed last week, the interest rate was reset from about 3.7 percent to 5.44 percent, Gross said.
The maximum interest Aurora could pay on the water bonds is 14 percent.
In October 2004, Aurora was paying an interest rate of 1.11 percent on the insured, auction-rate water bonds and saving money for the city in the process, Gross said. “Until the market collapsed, there was good reason to do this.”
Jeffrey Leib: 303-954-1645 or jleib@denverpost.com
