Credit crunch creates bond crisis for CIB

February 9, 2009

There's so much red ink on the Indianapolis Capital Improvement Board's books that accounting firm BKD LLP is evaluating whether it can continue as a "going concern."

That's the bean counters'  term for making a professional judgment about CIB's ability to keep operating, or if instead it must go out of business and liquidate its assets.

Many of CIB's financial problems, such as the $15 million shortfall at Conseco Fieldhouse, have been festering for years.

But the need to unexpectedly refinance $43 million in bond debts in the next six months is what tipped CIB into a cash crisis.

CIB can take some solace from the fact that it's not alone in its plight. Many government officials across the United States are in a similar cash crunch thanks to the unraveling of global credit markets. And because of the deterioration of many banks and most bond insurers, solutions are elusive.

"There is no rule book anymore. All the things that were supposed to be absolutes have been turned on their heads," said Amy Resnik, editor of the New York-based daily public finance newspaper The Bond Buyer.

"We are in a time of unprecedented volatility and unprecedented economic stress."

CIB Chairman Bob Grand said that soon after Mayor Greg Ballard appointed him to the panel early last year, he formed a finance committee to investigate its obligations. He said the committee found CIB had been carrying operating deficits since 1999.

But one issue clearly demanded immediate attention. In 2005, CIB had negotiated a swap agreement with KeyBank that trimmed interest costs on bonds issued in 1995 for construction of Conseco Fieldhouse, the $183 million venue for the Indiana Pacers.

Three years later, as credit markets weakened, KeyBank exercised its right to terminate the agreement—forcing CIB to scramble to find new financing.

When alternate ideas fizzled, the Indiana Treasurer's Office stepped in to provide a one-year, $16.9 million loan.

"Part of the reason we needed to go to the treasurer for the swap was because financial conditions changed over a 48-hour period when we were looking to do a financing," said CIB Treasurer Ann Lathrop, a former city controller who now is a partner with the local office of Crowe Horwath LLP, an Oak Brook Ill.-based accounting firm.

"In today's market, you need to have one, two or three options."

The treasurer's loan comes due in June. That gives CIB little time to refinance it again, either with another bank or via new bonds. And debt markets remain in turmoil.

"The loan that we got from the state treasurer will be paid off on its due date. That was a one-time effort that the state treasurer was very helpful to us to give us a window of opportunity," Grand said.

"If we can [re]finance it between now and then, we will gladly do it. The markets are not amenable to that."

CIB was slammed last fall by a second major bond problem—this one stemming from the weakening economy.

In the 1990s, CIB had chosen to purchase insurance on bonds related to Conseco Fieldhouse, the Indiana Convention Center, the RCA Dome and Victory Field—a move that freed it from having to post a large cash reserve to back the bonds.

Buying so-called surety policies long has been a common practice for municipal governments. But last year, ratings agencies downgraded the financial strength of CIB's insurers—New York-based Ambac Financial Group Inc. and Armonk, N.Y.-based MBIA Inc.

The terms of the bonds now require CIB to either buy new surety policies or find $26.3 million in cash for a reserve by September.

"Until two years ago, the idea that a major bond insurance company, especially Ambac and MBIA, could be downgraded was unfathomable," said The Bond Buyer's Resnik. "It was not how anything had happened for the previous 20 years."

The Indianapolis Bond Bank estimates new insurance would cost $1.3 million annually, if it's available. That would be a pricey option. Resnik said only two bond insurers have retained high ratings, giving them the opportunity to charge a premium.

And she said CIB must consider the risk that further market deterioration would lead to those firms' receiving downgrades as well.

"It's not an unreasonable fear to say once burned, twice shy," Resnik said.

Bond markets have begun to thaw in recent weeks, likely providing an opportunity for CIB to raise the $43 million it needs within six months, said Randy Ruhl, manager of the public finance department for City Securities Corp., Indiana's largest investment firm.

He said CIB still has a relatively high rating of AA- on its "senior lien" bonds and thus probably would be in a good position to issue bonds once it identified an ongoing revenue stream to repay them.

Based on current interest rates, CIB likely would have to pay about $4 million a year for 20 years. A bond issue would need about 60 days' lead time. A bank loan could be arranged more quickly.

"This is not just something isolated to the CIB. This is happening around the country," Ruhl said.

"Clearly, if you read the periodicals we read every day, the market looks very favorably on higher-rated credits—AA and higher—because of what's happened in our business."

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