Lincoln Center for the Performing Arts, which dismissed orfurloughed 200 employees after canceling performances because ofthe pandemic, is borrowing $73 million to endderivative trades with Morgan Stanley and Bank of New York MellonCorp.

The home of the New York Philharmonic, the Metropolitan Opera,and the New York City Ballet entered into interest-rate swaps in2006 and 2008 to lock in fixed rates on $150 million offloating-rate bonds. However, the contracts' value toLincoln Center plummeted as interest rates fell to historic lows,and it had to draw $30 million on a line of credit to postcollateral.

In mid-August, Lincoln Center plans to issue about $140 millionof fixed-rate tax-exempt debt at a premium to refinance the bondsand about $73 million taxable bonds to pay off the swaps, accordingto Leah Johnson, the center's chief communications and marketingofficer. Lincoln Center is taking advantage of low interest ratesto cut exposure to variable-rate debt, free up its $100 millioncredit line, and potentially reduce interest costs compared withalternatives, she said.

"At the time, given the historical interest rate trend line, itseemed like the appropriate course" to execute the swaps, saidJohnson. "We're not going to second guess."

Lincoln Center was among scores of U.S. states, cities, andnonprofits that sought to save money by borrowing withfloating-rate bonds paired with interest-rate swaps instead ofselling traditional fixed-rate debt. Under the swaps,municipalities received a variable-rate payment from banks, meantto cover the rate on the bonds, and paid a fixed rate inreturn.

The deals unraveled during the financial crisis when the housingbust hammered insurers that guaranteed the bonds, causing theinterest rates to soar. While many governments paid billions toback out of the deals after the crisis, others, including LincolnCenter, opted to replace insurance on the bonds with bank lettersof credit that would guarantee the bonds from default and helplower rates.

Under the swaps, Lincoln Center paid Morgan Stanley a fixed rateof 3.7 percent on $95 million of variable-rate debt and paid Bankof New York 4 percent on $50 million of bonds. The banks paidLincoln Center 69 percent of 3-month London Interbank Offered Rate(LIBOR), Johnson said.

As long-term rates declined in the last decade—because ofFederal Reserve bond purchases, sluggish economic growth, and (morerecently) a coronavirus induced flight to U.S. Treasuries—the valueof the swaps to Lincoln Center plummeted from a gain of $2.7million in 2006 to a $73 million loss. Since 2006, yields ontop-rated 30-year tax exempt bonds have declined to 1.5 percent,from 4.4 percent.

Unwinding the swaps will eliminate further losses if interestrates continue to fall and avert the need to transition to a newbenchmark when LIBOR is phased out at the end of 2021, Johnsonsaid.

The pandemic has put even more pressure on Lincoln Center'sfinances. It has dismissed 55 staffers permanently and furloughedabout 150, Johnson said. Lincoln Center is projecting a $10 millionoperating loss and $3 million in restructuring expenses, accordingto an S&P Global Ratings report this week.

See also:

• Spike in LIBOR Offset Rate Cuts
• Is the Fed Undermining the Push to KillLIBOR?
• Showdown in the LIBOR Corral
• LIBOR's Demise Will Up-end Derivatives
• 'Zombie LIBOR' Threatens Market's ComplacentView

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