Poway: It’s not too late to unwind

September 7, 2012
horrible bond deal, borrowing $105 million now and promising to repay a total of $981 million by the time 2051 rolls around.

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Remember the Poway school district? They did a horrible bond deal, borrowing $105 million now and promising to repay a total of $981 million by the time 2051 rolls around. The deal was broken up into lots of tranches, none of which start paying back any money at all before 2033. The most egregious tranche of all was the longest one: a bond with an original principal amount of $13,986,037.80, which matures in 2051, when bondholders will receive a total of $321,740,000. That’s more than $22 of interest for every dollar borrowed today.

One of the most distasteful parts of the deal — whose prospectus can be found here — comes in a short and bold-faced single-sentence clause right at the front:

No Optional Redemption

The Series B Bonds are not subject to optional redemption prior to their fixed maturity dates.

In other words, Poway has no call option on these things, and now that they’re issued, it has no choice but to pay up the whole $321,740,000 in 2051.

But that doesn’t mean it’s too late to fix this mess. Matt Levine has an absolutely wonderful post up about SunTrust’s stake in Coca-Cola — a true marvel of clear, funny, approachable prose explaining highly-recondite concepts. In this case, SunTrust, a bank based in Atlanta, has agreed to sell off a stake in Coca-Cola which it has held since 1919. Even though, at least as far as US regulators are concerned, it already sold off that stake, back in 2008.

But the way that deal was structured, SunTrust got some but not all of the proceeds in 2008, and was still massively exposed to Coca-Cola shares: so long as the shares were worth more than $33 each (they’re now at $38), SunTrust was due another $14 per share between 2014 and 2015. And this deal, too, could not be undone. Here’s the language, from Levine’s footnote:

SunTrust generally may not prepay the Notes. The interest rate of the Notes will be reset upon or after the settlement of the Agreements, either through a remarketing process or based upon dealer quotations. In the event of an unsuccessful remarketing of the Notes, SunTrust would be required to collateralize the Notes and the maturity of the Notes may accelerate to the one year anniversary of the settlement of the Agreements. However, SunTrust presently believes that it is substantially certain that the Notes will be successfully remarked.

But in light of new regulations, SunTrust decided it that it did want to prepay the notes after all. And — guess what — it has found absolutely no difficulty in doing so.

And if SunTrust can prepay obscure and highly-illiquid equity-derivative instruments, you can be quite sure that Poway, if it put its mind to it, would be able to prepay some of those horrible 2051 bonds. One obvious way of doing so would be to just go out into the market and buy them: they’re trading pretty much at par, and my guess is that if they offered to pay say 105 cents on the dollar, they’d be able to buy back many if not most of the outstanding debt. Which is a hell of a better deal than paying back 2,300 cents on the dollar, which is what they’re currently contracted to do.

Since the details of this bond deal were made public, the San Diego population has reacted as you might expect — with no little outrage. They want the deal unwound. And although there’s nothing in the letter of the contract which makes that possible, a decent banker should be able to get them out of this dreadful obligation at relatively little expense. Especially compared to the cost of staying in it.


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