BATON ROUGE, La. (AP) - Louisiana will pay as much as $90 million to get out of a troubled borrowing deal that helped rebuild and upgrade the Superdome in New Orleans after Hurricane Katrina.
The State Bond Commission gave preliminary approval Thursday to debt refinancing for the Louisiana Stadium and Exposition District that will include a termination payment to Merrill Lynch to end the agreement.
The proposal will restructure a $294 million bond deal from 2006 that became saddled with problems as part of the credit crunch and financial downturn two years after the deal was struck. The penalty will be rolled into the refinanced borrowing and paid off over decades with the rest of the debt.
"It's not a perfect deal. But we've got a mess here, and we've got to clean it up," said Treasurer John Kennedy, chairman of the Bond Commission.
The bonds were originally "auction-rate" securities, which were tied to short-term interest rates reset every week. The LSED, the state agency that oversees the Superdome, used the bonds to refinance debt, fund Dome improvements and provide working capital under the expectation that it would hold down the agency's interest costs.
It did just the opposite.
The arrangement exploded in interest costs as high as 12 percent on about $238 million of the bonds, after the market for government securities dried up. The state bought the debt temporarily to force down interest costs that were costing the stadium and exposition district an extra $65,000 per day.
The state's ownership of the bonds is set to expire at the end of the year. Kennedy said if the state doesn't get rid of the bonds at that point, the IRS will declare them taxable.
Superdome manager Doug Thornton said the auction-rate bonds were the "only real means of financing" available to the LSED after Katrina to help restore the damaged stadium.
"We didn't know there was going to be a liquidity crisis for big banks," Thornton said.
The LSED has a pending lawsuit against Merrill Lynch about the bond deal, which was supported by then-Gov. Kathleen Blanco.
The restructured financing plan, which received preliminary approval from the Bond Commission and will be up for final backing next month, would involve up to $450 million in borrowing, paid off over as many as 35 years.
The dollars would be used to buy out the state's share of the bond debt, pay the termination penalty to Merrill Lynch, get rid of the floating interest rates and limit debt payment for the stadium and exposition district to $26 million a year.
Thornton said the agency can afford that debt cost under its current estimates of annual revenue from local taxes and other funding sources dedicated to the LSED.
"We think this is probably the best path forward at this time," Thornton said.
Final plans also need the backing of Gov. Bobby Jindal and the House and Senate budget committees before the debt restructuring can happen and the new bonds can be sold, according to a Bond Commission analysis.