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UPDATE 1-Alabama officials perplexed by debt-deal fizzle

(Adds financial adviser’s, other comments)

MIAMI, June 12 (Reuters) - Alabama finance officials are puzzling over why no bidders showed up for a debt offering by the Alabama Public School and College Authority, forcing organizers to scuttle the deal.

Well known in the market, with about $2.3 billion of debt outstanding, the AA-rated authority on Thursday unexpectedly canceled a $285 million competitive offering of refunding bonds because no bids were received.

A nearly $40 million offering of new money bonds was also canceled by the authority, which has filed a lawsuit against JPMorgan Chase & Co JPM.N in a dispute over financial derivatives.

The authority’s financial advisers and state officials are searching for explanations but so far attribute the fizzled deal to general market conditions, according to Bill Newton, Alabama’s acting finance director.

“The bond market has been kind of strange for a number of weeks,” Newton said.

Phil Dotts, president of Public FA Inc, an adviser on the authority deal, said the main reason for the poor turnout was probably June’s big jump in muni yields. On June 1, the yield on a top-quality 10-year bond was 36 basis points fewer than Friday’s close.

“We had to have a certain savings number, and, as we got closer to Thursday, we knew we were closer to the threshold,” Dotts said. “We had bidders signed up and several goodwill deposits days before.”

Dotts said the derivatives dispute would not affect the credit-worthiness of the authority and was much less a factor in the scuttled sale than the fact that the rise in yields this month ate into the anticipated cost savings.

The $2.7 trillion tax-free market rallied for most of 2009, a trend that was a boon to issuers because interest rates on munis fell as market prices increased.

But the rally has reversed in recent weeks despite forecasts of more price gains because of investors’ reinvesting interest payments and redemptions of current holdings paid out in June and July.

Standard & Poor’s Ratings Services gave the Alabama deal an AA rating, but tagged on a negative outlook because of concerns that costs from the derivatives dispute might weaken the authority’s ability to service the debt.

“The negative outlook reflects what Standard & Poor’s views as the continued long-term uncertainty surrounding a future federal court decision in connection with a dispute between the authority and JP Morgan Chase Bank involving various swap options entered into in 2002 and amended in 2003,” S&P analyst Sussan Corson said.

No hearing date for the lawsuit has been set.

Alabama’s Jefferson County, home to Birmingham, is also caught up in a high-stakes derivatives dispute that has left the state’s biggest county flirting with the possibility of a rare municipal bankruptcy filing since early 2008.

Some analysts and officials have said a Jefferson County default could hurt all Alabama issuers in the eyes of lenders. Dotts said the county’s woes were irrelevant to the credit-worthiness of state issuers.

State officials have not decided whether the authority would revive the bond deal and were unlikely to do so until later in June, according to Newton. (Editing by Jane Sutton and Dan Grebler)