Louisiana Commission Proposes New Rules On Bond Refundings To Prevent Abuses
Louisiana's bond commission has proposed tough new rules on refundings that would require issuers to achieve either a 5% present-value savings on such deals or demonstrate they are being done to avoid financial hardship.
"We feel it is very important to clarify the guidelines for refundings because refundings have the greatest potential for abuse," Anthony Gelderman 3d, general counsel to state Treasurer Mary Landrieu, said yesterday. "We also want to make sure there is some kind of common standard for these financings and that there is adequate time allowed for a review process. The idea is to be sure that all refundings are treated equally."
Both Mr. Gelderman and Rae Logan, executive director of the bond commission, said the refunding rules are also aimed to assure potential investors in Louisiana debt that these borrowings will not become the subject of some future regulatory crackdown.
"What we don't want to see are refundings whose main purpose is to generate fees for investment bankers," Ms. Logan said. "We will insist that there be some clear economic benefit."
Neither state official singled out any specific abuses of past refundings in the past, insisting that the rules are meant to prevent future problems.
Mr. Gelderman said the proposed standard would apply to any refunding debt issued by a bond-issuing authority in the state. He noted that the rules attempt to bring clear guidelines to both "high-to-low" refundings - where an issuer replaces outstanding bonds with those carrying a lower interest rate - and refundings undertaken to restructure debt or remove a restrictive covenant.
To obtain approval for a refunding, a prospective issuer would be required to complete a two-step process, the Louisiana official said. First, at least eight weeks before an anticipated sale, the issuer would have to apply for preliminary approval. To receive approval, the issuer would have to specify which bonds it wanted to refund, as well as the size and type of the refunding bonds to be sold.
After obtaining preliminary approval - but at least 20 days in advance of the commission's last scheduled meeting before the sale - the issuer would be required to submit a complete application. This would include a debt service schedule, interest rate scales, and a complete explanation of the purpose of the debt.
"Frankly, we want to slow down the approval process so adequate time is taken to review all issues," Mr. Gelderman said.
Within the high-to-low category, he added, all proposed issues must achieve present-value savings of 5% or greater. In addition, present-value savings must be at least 1 1/2 times cost of issuance.
These costs are defined to include: underwriters' discount, bond counsel fees, rating agency fees, and printing. If bonds in a multiple series are to be refunded in a single issue, the bonds to be refinanced can be lumped together to meet the present-value savings requirement.
For current high-to-low refundings, the bonds to be refinanced must be redeemed within 90 days of issuance, and final maturity year of the refunding bonds must be no later than the final maturity year of the bonds to be refunded.
For refundings that seek to restructure debt, the issuer would be required to present "clear and convincing evidence that a default or substantial hardship is likely to occur" if the borrowing does not occur, Mr. Gelderman said. A two-thirds vote of the commission would be required for approval of this type of debt, compared with a simple majority for high-to-low refundings.
Mr. Gelderman acknowledged that the draft rules, which were first distributed to the commission last week, could impose serious restrictions on issuers. He said a special session of the bond commission that could be held as early as next month would seek public response to the proposed rules.
"We have drafted tough rules because we meant to elicit a thorough discussion," he said. "These rules are not set in stone," he added, explaining that they could be modified.
