UPDATE 1-NYC to refinance only 20 pct of floating-rate notes

(Adds byline, details on refinancing, tax-exempt bond sale)

By Joan Gralla

NEW YORK, March 4 (Reuters) - New York City will refinance later this month about $1.3 billion of auction rate debt and $140 million of variable rate demand notes insured by FGIC (BX.N: Quote, Profile, Research) (PMI.N: Quote, Profile, Research), joining an increasing list of issuers fleeing these two troubled markets.

The refinancing will affect only about 20 percent of the city's outstanding floating-rate notes, according to estimates by New York City Comptroller William Thompson.

Some bond insurers that guarantee both of these kinds of securities face billion-dollar losses from their expansion into subprime plays. This has spooked investors into selling so much auction-rate and variable-rate demand notes that they have swamped dealers, causing yields to spike for many issuers.

New York City's refinancing plan will still leave it with about 80 percent of its variable rate general obligations, which totaled $7.2 billion, according to the comptroller's estimates. The city will announce later which specific auction rate bonds it will refinance.

Auction rate paper is reset at periodic intervals from one to 35 days, but numerous auctions have failed ever day since late January, when the market's first-ever failures occurred.

Auctions fail when there are not enough buyers. As a result, municipal issuers that have sold about $250 billion of this paper have had to pay high penalty rates of as much as 20 percent.

Variable rate demand notes have safeguards that ensure investors can get rid of them, such as letters of credit or standby purchase agreements. But this market now has split in two, with issuers whose debt is not backed by insurers drawing exceptional demand, pushing the rates they pay to 1 percent or less. But issuers who chose insurers no longer deemed credit-worthy are paying as much as 10 percent.