When Wachovia Bank sold the $64 million in convention center construction bonds, the proceeds were transferred to M&T Bank for investment. Under the terms of the investment contract, the account holding these funds must have been put out for bid. One of the few methods allowable under the bond agreements is known as a “Guaranteed Investment Contract”, where a financial company will invest these funds for the maximum rate of return. Only companies with AAA ratings were considered.
The winner of the bidding process was MBIA, a diversified insurance company that has several divisions, including one that specializes in municipal accounts. Their contract provides the LCCCA with somewhere around 5 1/4% interest on the remaining balance in their construction account, which is currently around $30 million.
One of the terms of this agreement is that if the rating of the company falls two full steps, from AAA to AA, the investment company has 15 days to either refund the LCCCA’s cash balance, or “capitalize” the remaining balance by holding enough cash on hand to cover the LCCCA’s account balance.
On Friday, June 20th, 2008, Standard and Poor’s lowered MBIA’s ratings to “AA”. The same day, Moody’s lowered MBIA’s ratings to “Baa2”, the second lowest investment grade. Fitch initially lowered its rating to “AA”; but after MBIA stopped providing financial information, Fitch today (June 26) ceased rating the company. These actions last Friday immediately triggered the capitalization provision of the Guaranteed Investment Contract; MBIA has until Monday, July 7 to either set aside enough cash to back up the LCCCA’s investment, or refund the LCCCA’s balance in cash.
In the extremely unlikely event that MBIA would declare bankruptcy before the company fulfills its contractural obligations to the LCCCA, nearly half of the convention center’s construction funds would immediately become unavailable. If this were to happen (there is a very low probability that it would), whether the LCCCA’s funds would ever be returned would depend on the courts. Without the ability to access its funds, the LCCCA would be unable to pay its bills, and construction of the convention center would quickly come to a halt – indefinitely.
MBIA closed today (June 26) at $4.39, down from a 52-week high of $68.98.
Editor’s note: Wachovia Bank has guaranteed the bond funds. It would seem likely that no matter what arrangement Wachovia may have subsequently entered into with others, Wachovia would remain obligated to the Convention Center Authority and Penn Square Partners to fund construction draw requests. Meanwhile, the Authority awaits passage of the State budget so that it can draw down promised State funds.
