Bond refinancing not accurate

Published 12:00 am Saturday, May 27, 2006

Natchez &8212; A gigantic check may have created a slight misunderstanding by city residents and leaders.

Last week the City of Natchez was presented a ceremonial $400,000 check representing the upfront proceeds from a bond payment swap arrangement the city is close to finalizing. The swap involves $9.8 million in bonds related to the construction of the Natchez Convention Center.

But the oversized check represented the gross amount of the transactions proceeds, not the net, a fact which wasn&8217;t clear as the prop-like check was handed over on Tuesday.

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After all of the financial parties involved in the deal receive their fees, the upfront money going to the city will total approximately $170,000, Natchez Mayor Phillip West said Friday.

&8220;I was disappointed, honestly,&8221; West said. &8220;(But) it&8217;s still a good thing. It&8217;s like when you think you&8217;ve got a homer and the ball falls short and you wind up with a triple.&8221;

West said he believed the confusion occurred for two reasons.

First, the creation of a new policy by the Mississippi Development Bank, greatly delayed the transaction and ultimately added a larger bond agent, one with an AA rating, into the deal.

Since the original estimates did not include having to have an AA rated entity, the amount the city had to be lowered in order to pay the added partner, the Bank of New York.

West said he believed the new policy of the MDB could have cost Natchez at least $100,000.

Natchez City Attorney Walter Brown said he wasn&8217;t certain whether or not the fees associated with the swap were typical.

&8220;This is the first one I&8217;ve ever seen,&8221; Brown said.

The second reason may have been that the Malachi Group, one of the bond agencies involved, wanted to show the city the full amount since the figure of $400,000 had been discussed on numerous times.

West said he had told a Malachi representative that the city was looking forward to seeing the $400,000 check almost every time the bond restructuring and payment swap was discussed.

&8220;I think since I had made the statement on a couple of occasions, I&8217;m thinking he was trying to make sure he had that number on there because that&8217;s what I was expecting.&8221;

West said originally that the city had discussed putting the expected $400,000 payment into a reserve, or rainy day, account.

He said aldermen would discuss specifics of what to do with the $170,000 expected payment during Tuesday&8217;s meeting.

Despite the lowered upfront savings, the payment swap is still expected to net the city approximately $2 million in savings over the next 18 years, West said.

&8220;Anytime you can save $2 million, you feel good,&8221; West said.

In addition to the swap, the city also refunded the bonds which is expected to save $220,000 to the city &8212; $150,000 this year and $70,000 next year.

Brown said although the swap appears to be a good one for the city and will likely work out, he still has concerns over the procedure and the risks.

&8220;When the deal was brought to the city I had some misgivings about it, mostly because I didn&8217;t fully understand it. I knew enough about it to know that we were taking a risk.&8221;

A bond swap is a complicated financial transaction in which one entity, in this case the city, agrees contractually to &8220;swap&8221; a payment usually based on a fixed rate interest index, with another entity whose payment is usually based on a variable rate.

In this case, the city agrees to pay the interest equivalent to the Bond Market Associations (BMA) index. The bank agrees to pay a percentage of another interest index, the London InterBank Offered Rate, or LIBOR.

Historically, this swap will yield profits for both since the new bond agent assumes the city&8217;s bonds, which are originally issued at a relatively low, municipal rate, the agent can generally earn a higher rate on its money. The difference is split between the two parties.

Since the swap is tied to the difference between those two interest indexes, changes in the interest rates will affect the payments and the potential profits.

That gap could also shrink if federal tax code were to be drastically changed, and municipal bonds lose their tax-exempt status.

West said the city weighed the risks and the aldermen felt the swap was solid.

&8220;Based on the investigations we did, it&8217;s not a 100 percent thing, but the problems are rare,&8221; he said. &8220;Everything you do in life is a chance and there&8217;s a history where this has worked.&8221;