Corporate & Securities Law

Risky Interest-Rate Swaps Spell Trouble For Denver Schools

By Steven Caruso

Under the advice of JPMorgan Chase, high-risk interest-rate swaps have produced a mountain of debt for the Denver Public School system. The intent of the deal was for Denver schools to raise $750 million to refinance old debt and fully fund its pension system. That didn?t happen.

As reported back in March 2010 by The Cherry Creek News, it was former Denver Public School Superintendent Michael Bennet who first convinced the Denver school board to buy into the deal with JP Morgan. The strategy involved using variable-rate debt with interest rates of about 5%. The bank then attached an interest-rate swap to the arrangement, which essentially bet taxpayer money that interest rates would remain high.

When interest rates fell to historic lows, the deal earned the banks millions of dollars in fees, while Denver schools lost big.

Denver now wants to get out of the deal. But it will pay a hefty price to do so. The schools would have to pay the banks $81 million in termination fees, or about 19% of the system?s $420 million payroll.

As for the former superintendent at the center of the debacle, Bennet is now Democratic Senator Bennet - and desperately trying to stave off the bad press surrounding his role in the Denver school deal. On Tuesday night, Bennet beat out Andrew Romanoff - 54.2% to 45.7% - in Colorado?s Senate primary.

Full post as published by Representing Investors on August 11, 2010 (boomark / email).