State officials tentatively agreed Thursday to pay at least $80 million to Merrill Lynch in order to scrap a much-criticized loan agreement.
The payment, which hinges on the state ending litigation with the financial management giant, would allow the state to rework debt incurred to put the Superdome back into commerce after Hurricane Katrina.
“We’ve looked at this deal. It’s not a perfect deal. But we have a mess here, and this will clean it up,” State Treasurer John Kennedy said during a meeting of the State Bond Commission.
At issue is a financial snarl that the Louisiana Stadium and Exposition District became entangled in after the 2005 storm.
The district, which manages what is now called the Mercedes-Benz Superdome, borrowed about $300 million to refund $195 million in existing debt, repair storm damage and generate cash. The bulk of the borrowing was done through auction rate bonds, which offered a cheaper, but volatile, interest rate.
Auction rate bonds, or loans, are sold every seven days to investors, resulting in a frequent change of the interest rate on the borrowing.
The state’s problem wasn’t the fluctuating interest rate but the collapse of the high-risk housing market, which created financial problems for investors and made them reluctant to bid on auction rate bonds. That reluctance triggered a default to a 12 percent interest rate that was supposed to be a worst-case scenario backstop.
Suddenly, the Louisiana Stadium and Exposition District was paying $60,000 a day in interest.
The state swooped in and bought the bonds. A lawsuit was filed against Merrill Lynch for allegedly misleading the state about the stability of the auction rate bond market.
Kennedy said Thursday that former Gov. Kathleen Blanco insisted on the auction rate bonds that resulted in the state paying the 12 percent interest rate.
Because of the problems with the auction rate bond market, the Internal Revenue Service allowed municipalities to buy back bonds without them being taxable. The tax exemption expires at the end of this year.
“We’ve got to do something by the end of the year,” Kennedy said. “(Or) we will own them forever.”
Through up to $450 million in revenue refunding bonds, debt payments will be limited in the future, the tax exempt status will be retained and a fixed interest rate will be locked in, said Whit Kling, director of the State Bond Commission.
Attorney Meredith Hathorne said the bond issue includes a refinancing of the $238 million in bonds owned by the state and $55 million in bonds owned by Merrill Lynch. She said the issue also includes an $80 million to $90 million termination fee to Merrill Lynch.
Senate President John Alario, R-Westwego, said the termination fee is akin to what the state would have paid in interest if the arrangement were not changed.
Kennedy said approval of the $450 million bond issue is just preliminary. The litigation with Merrill Lynch must be settled before more details can be revealed, he said.
The court battle is playing out in New York, where part of the case is under appeal.
“This was a bad deal ... We have lost our rear end on this,” Kennedy said.