10/07/05

EIFP Project to Eliminate Major Source of Water Pollution in Bergen County

Innovative Project is First Use of Variable Rate Demand Bonds

Thousands of gallons of leachate (contaminated liquid from landfills) from a Bergen County site are polluting New Jersey's waters every day. To eliminate this serious contamination, the New Jersey Environmental Infrastructure Trust will fund a cleanup project using a new financing approach - the issuance of Variable Rate Demand Bonds . A loan will be made to the Bergen County Improvement Authority, who will fund a loan to the project sponsor, Encap Golf Holdings, LLC. This is a special, single-issue bond sale not part of the Trust's regular pool program.

This much-needed cleanup, which is a combined effort by both public and private entities, has been endorsed by environmental groups such as the Hackensack Riverkeeper.

The proposed remediation involves capping four landfills to prevent rainwater infiltration and the installation of cutoff walls and a leachate collection system. The leachate will be conveyed to a sewage treatment plant for treatment and disposal.

Known as ENCAP, the project will further the state's smart growth mission by reclaiming a former brownfields site for beneficial uses including a housing complex, a shopping mall and golf courses. Reclaiming contaminated sites helps preserve existing pristine open space by providing new areas for development.

What are Variable Rate Demand Bonds?

Tax-exempt Variable Rate Demand Bonds (VRDBs) have been issued by governments and government agencies and authorities since the early 1980s and have become a useful tool in structuring debt to meet certain financial objectives.

VRDBs are issued in a specified short-term interest rate mode; most typically this is the weekly mode. The interest rate that will be paid on a particular series of VRDBs is established and that rate will be in effect for the next seven days. After seven days, a new interest rate is established and each bondholder may elect either to keep the bonds they own, on which they will receive interest at the new weekly rate, or tender their bonds back to the issuer of the bonds for repurchase by the issuer. Because they have this tender right each week, an investor has made only a one week investment and is, therefore, willing to accept a relatively low rate of interest in return for this liquidity.

To insure money is available to honor each tender when it occurs, the VRDBs must be backed by a letter of credit provided by a highly rated commercial bank. When a bondholder elects to tender bonds, the letter of credit is drawn upon and the principal amount of his investment is returned to the bondholder. The tendered bonds are then remarketed to a new bondholder and the proceeds of that sale are used to reimburse the draw on the letter of credit.

The weekly interest rate is established by a remarketing agent chosen by the issuer of the bonds. The remarketing agent is an investment banking firm that sets the weekly rate based both upon market conditions prevailing on the date of the interest rate re-set and the credit quality of the bonds and the letter of credit that supports the bonds. The remarketing agent is also responsible for reselling any bonds that are tendered.

VRDBs are generally issued for one or both of the following reasons:

1) to permit an issuer of bonds to pay the lowest possible rate of interest; and/or
2) to provide flexibility with regard to the timing of the final redemption date of the bonds (because VRDBs may be redeemed in whole or in part at virtually any time, they may be retired if and when funds which are available for the redemption are received).

There are two principal risks associated with VRDBs: 1) short-term interest rates will rise sharply and weekly interest rates will actually exceed the rate at which fixed rate bonds could have been issued initially and 2) the term of the letter of credit supporting the bonds (typically 3 years) will expire. At that point, if an extension of the term of the letter of credit is not available or if a replacement letter of credit cannot be found, it will be necessary to remarket the bonds as long-term, fixed rate bonds. This event may occur in a high interest rate environment that is not favorable to the issuer of the bonds.