(snip)" NEW YORK, Jan 30 (Reuters) - Washington, D.C.'s Georgetown University and a Nevada utility on Wednesday confirmed that a couple of their auction-rate municipal bonds had failed at auction, which experts said was believed to be the first time that this had ever happened.
Auction-rate debt is an instrument whose rates are reset periodically, and if an auction fails, the issuer must pay a higher penalty interest rate. An auction fails when no buyer can be found and the dealer does not take the paper back.
The confidence-rattling problems gripping bond insurers have sliced demand for the paper they guaranteed as well as other floating-rate securities. This has forced states, cities and towns around the nation to pay much higher rates than the 2-3 percent levels they had been paying.
Tax-free issuers have sold a total of $250 billion of muni auction-rate debt and many are now reviewing whether to switch to a different kind of floating rate debt, such as variable rate demand obligations, which can be more liquid.
Lehman Brothers (LEH.N: Quote, Profile, Research) was the dealer for both of the debt issues whose auctions failed.
Other states and utilities that also used Lehman got hit with failed auctions of their muni floaters on Jan. 22, according to a market source. "It was a bad Tuesday," said the source, who requested anonymity"(snip)
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