City To Refinance Debt, Exit Risky Market

New York City today is selling hundreds of millions of dollars in fixed-rate bonds in an effort to counter the soaring cost of floating-rate debt, joining a growing slate of municipalities fleeing the most troubled corners of the credit market.

The city's $448 million bond sale today marks a first step in its effort to refinance more than $1.4 billion in floating-rate debt that has either failed or appears to be on the verge of doing so.

Traditionally viewed as a safe investment, this debt in recent weeks has hit issuers with soaring interest rates as investors flee the market on fears that insurance companies backing these securities will buckle under pressure from the credit crunch.

"The city's economy will not be able to resist the downward pull of a national slump and continued turmoil on Wall Street," Comptroller William Thompson Jr. warned last week when announcing the plans to refinance the debt.

The refinancing plan, which is to be completed by April 1, will rid the city's coffers of two increasingly costly forms of borrowing: auction-rate securities and variable-rate demand notes that are backed by struggling insurers. Both forms of debt allow issuers to borrow for long periods, but at short-term interest rates that adjust on a weekly or even daily basis. Auction-rate securities regularly reset at auctions held by Wall Street dealers, while securities firms sell variable-rate demand notes at whatever interest rate meets the market's demand.

Until recently, auction-rate and variable-rate securities were considered safe havens for investors, because their short-term interest rates offered a quick way to convert the long-term assets into cash. In the past several weeks, however, skittish investors have been abandoning the market at a record pace, causing debt prices to plummet and interest rates to skyrocket.

Now, municipal issuers are getting stuck with the tab.

In the last month alone, New York City has seen a large chunk of its roughly $2 billion in auction-rate debt fail at least once, with rates resetting to their maximum level of 5%. At the same time, plummeting demand for variable-rate demand notes backed by insurers, such as the recently downgraded Financial Guaranty Insurance Co., has pushed rates as high as 8%.

Of the city's total $7.2 billion in floating-rate debt, about $1.44 billion is slated for refinancing, including $1.3 billion in auction-rate securities and $140 million in variable-rate demand notes. The remainder of the floating-rate debt is considered "clean" because it is not linked to a cash-strapped insurer, a spokeswoman for the comptroller, Laura Rivera, said.

"Cities like New York are not going to stand for these rates for long," the vice president of the money-management firm Cumberland Advisors, John Mousseau, said of the high interest rates for floating-rate debt. "At some point, they have to say, 'We'd rather be safe than sorry. Let's call this stuff in and refinance it, so we're not stacked and stuck with it later on.'"