Miami-Dade's Wachovia letter of credit only guaranteed for two years
By Risa Polansky
A letter of credit from Wachovia covering up to $100 million in variable rate bonds for a Florida Marlins ballpark is only a sure thing for two years because of today's shaky financial market conditions.
The life of the bonds is 40 years.
At the close of this letter's two-year term, Wachovia and Miami-Dade County have an option to renew.
"In today's market, that is standard," said Frank Hinton, bond analyst in the county's Finance Department.
As recently as a year-and-a-half ago, the letter's term would have been three, five or seven years, he said.
But today's volatility means banks' "exposure is greater."
The market for short-term, variable-rate debt has declined, drawing fewer participants.
Shorter-lived letters of credit have become commonplace "in order to mitigate some of that exposure," he said, allowing banks an easier and quicker out if desired.
The county has no choice but to roll with it, Mr. Hinton said.
"We as an issuer have really no recourse but to accept what is being offered."
There's no guarantee the bank will renew after two years.
"In a prior market, a year-and-a-half, two years ago, we'd have the expectation that we would get an extension," he said.
That's less likely in today's market.
Should either player choose not to extend the letter of credit two years from now — or should any terms renegotiations at the time go sour — the county could seek another letter provider or convert the debt to fixed rate, negating the need for a letter.
The county is bound to Wachovia as its primary bank for the life of the letter of credit.
Leaving the bank means terminating the letter or risking altered — and potentially less favorable — costs.
County Commissioner Carlos Gimenez pointed out at last week's commission meeting in which stadium bond issuance was finalized that terminating this letter could mean higher costs to Miami-Dade — meaning the county is virtually forced to stick with Wachovia despite being in the midst of seeking bids for a new primary bank.
Switching from variable-rate to fixed-rate bonds if the variable rate rises, he also pointed out, generally means switching to an even higher fixed rate.
Pricing of the variable-rate bonds is set for July 13.
July 14, the county is to close on those, as well as other stadium bonds priced last week.
Last week's issuances are to cost the county about $2.5 billion in debt service over the next four decades, according to documents provided by underwriters Merrill Lynch and J.P. Morgan.