District seeks bond relief to ‘stop the bleeding’

Published December 10, 2008

By Patrick E. Litowitz
New Castle News

The New Castle Area School District is pursuing relief from pressures associated with the international bond market.

Its best hope may be a Pittsburgh-based bank.

Through Dec. 1, the district lost approximately $144,000 on its interest rate swap with JPMorgan Chase & Co. The transaction involves New Castle’s 2008 bond series, valued at $9.7 million.

Overall, the district maintains a $327,000 surplus. Without action, business manager Joseph Ambrosini expects the losses to mount.

“We’re in a situation with our swaptions that is really starting to affect our district,” Ambrosini said last week. “Things took a turn for the worse in the last couple (of) weeks.

“What we have is not working at all.”

The worldwide financial crisis affected New Castle on two fronts. The amount it owed JPMorgan, which ranged from 1.3 percent to 2.6 percent based on the Securities Industry and Financial Markets Association index, jumped as high as 7.9 percent during September and October.

On Oct. 23, those rates returned to their normal averages.

New Castle’s second problem, which continues, involves the reselling of its bonds.
The Royal Bank of Canada acts as the district’s remarketing agent. When the bonds aren’t purchased, the district is charged a 12-percent fee. Eight of the past 12 weeks, New Castle has been assessed the maximum charge.

“Let’s stop the bleeding,” said Michael Zbasic, a representative of PNC Capital Markets.
Greg McKenna and Zbasic, a Laurel School District board member, met with the city school board after its reorganization session. PNC Capital Markets is a subsidiary of PNC Financial Services Group.

The uncertainty of the bond insurers ability to pay on potential losses compounded the problem. European-based Dexia insures New Castle’s bonds.

“All the municipal bond insurers are in trouble,” McKenna said. “The vast majority of them insured pools of sub-prime mortgages.

“Everybody is paying more money for higher borrowing costs because nobody wants to own bonds that are backed up by these insurers’ policies. That’s really the crux of the problem.”

New Castle and PNC Capital Markets have been in negotiations since mid-November.
An analysis of remarketing costs shows the Pittsburgh firm undercutting the Royal Bank of Canada by as much as 9 percentage points.

“The concerns are multiplying with your situation,” Zbasic said. “They don’t like the banker. They don’t like the insurer.”

Additionally, he said, the Royal Bank of Canada is not putting in the effort to resell New Castle’s bonds.

“PNC will work aggressively to find investors. They have a hard time selling Dexia’s name, where we would be selling PNC’s name.”

Attorney Patrick Healy, the district’s bond counsel from Cohen & Grigsby, urged the board to have an agreement in place by January.

“I think it’s important for your taxpayers and everyone to realize you are not in the hole,” Zbasic said. “You are still ahead of the game.

“If you keep paying 12 percent a month for another month or two, you won’t be.”