The Port Authority of New York and New Jersey, which got socked with hefty rate increases when investor ardor for a type of short-term bond called auction rate securities cooled, is getting out of the business in favor of other sorts of debt such as commercial paper.
The port authority has about $700 million in the securities out of a total debt portfolio of about $11 billion.
It already has plans to convert $200 million to short-term commercial paper and get totally out of the auction rate debt market in six to eight weeks.
Two weeks ago, the port authority saw the rate on $100 million of the auction rate securities -- whose rates were changed weekly -- jump from 4.2 percent to 20 percent when an auction for the securities failed to attract investors. They then fell back down to 8 percent this week. Rates on other debt -- some of which is repriced weekly, some every few weeks -- also rose, though not as high as 20 percent.
The result of the short-term turmoil is that auction rate securities have been no cheaper than other sorts of short-term debt such as commercial paper, which have terms of up to 270 days, said Anne Marie Mulligan, the port authority's treasurer, in an interview after this week's board meeting,
Mulligan said even with the rollercoaster ride of the past several weeks, they have been cheaper than if the port authority had sold longer-term debt.
The sudden reluctance of investors to buy auction rate securities appears to have little to do with concern about the underlying financial strength of institutions such as the port authority, whose issues are rated AA- by Standard and Poors and Fitch and A1 by Moody's.
But investors have been concerned about the financial strength of insurance companies that back the bonds, some of whom reportedly have exposure to subprime mortgage debt. That has sent borrowing costs for institutions ranging from schools to hospitals skyrocketing.
"This was effectively an elephant stampede and we got caught," said Darrell B. Buchbinder, the port authority's general counsel.
Mulligan said the port authority was a latecomer to the auction rate security market. The idea, she said, was to tap into a different class of investors, primarily wealthy individuals, who might like to invest in short term securities that would be highly liquid and have their interest rate reset each week.
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