Pasadena Restructures its Outstanding
Variable-Rate Debt

$71,450,000
City of Pasadena
Refunding Certificates of Participation

Five years ago, Pasadena sold $71 million of variable-rate demand COPS. To convert its debt-service obligations from variable to a fixed interest rate, the City simultaneously entered into an interest rate swap. On the issuance date, the bonds were insured by Ambac, which also served as counterparty to the interest rate swap. The swap empowered Ambac to convert its variable payments from a cost-of-funds basis to a LIBOR-indexed basis if rates on the variable-rate bonds rose above a trigger level.

The credit dislocations that unfolded in late 2007 and early 2008 caused a dramatic increase in Pasadena's debt costs. The most immediate effect was the decision by the major rating agencies to downgrade Ambac's credit rating from AAA to AA-/A+, causing interest rates on the variable-rate bonds to rise above the trigger level on the swap.

In addition, the City's variable rates began to trade at a spread above LIBOR that exceeded the historical relationship. Therefore, if Ambac exercised its authority to convert the swap to a LIBOR index, the variable payments Pasadena received from the swap counterparty wouldn't be sufficient to service the debt on the variable-rate bonds. In that case, the City would have been required to make up the difference.

De La Rosa & Co. worked hard with Pasadena's team to terminate the interest rate swap and to fix Pasadena's variable-rate bonds to a fixed rate. An important goal was bringing down the interest rate on the fixed-rate refunding bonds to the affordable levels of debt service the City was accustomed to paying.

To obtain AA+/AA lease ratings from Standard & Poor's and Fitch, De La Rosa and the Pasadena team stressed Pasadena's conservative financial management practices and strong local economy. The firm also communicated to investors the City's implied S&P general obligation ratings of AAA to encourage demand for the bonds.

At the time of sale, investors were wary of insured municipal bonds, but De La Rosa was able to leverage Pasadena's strong underlying ratings and investors' aversion to insured paper to sell the bonds to a wide range of investors.

"On the date of Pasadena's pricing," said Ben Stern, head of De La Rosa's Sales and Trading Desk, "we achieved more aggressive rates on these uninsured certificates than any AAA insured transaction in the market."

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