09/02/2008 Council Packet - Laserfiche WebLink

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Why are Swaps Used? • To save money! Swaps provide issuers the opportunity for more efficient access to the markets and lower interest costs as a result. • Access to better markets. Through use of swaps municipal issuers can access markets which have historically been used only by corporate borrowers. These markets are larger and more liquid than traditional municipal cash markets. At the long end of the curve, BMA -based swap rates can be significantly lower than the rates of traditional tax - exempt fixed rate debt. LIBOR -based swap rates generally allow for savings vs. traditional tax - exempt fixed rate debt at all points on the yield curve. • Structure flexibility. Swaps allow issuers to include creative options such as extension, cancellation, etc., into their issues to better fit their needs or to reduce costs or enhance yields received. meni Advisors Springsted Floating to Fixed Rate Swap (Synthetic Fixed Rate Debt) Standard Bond Issue • Issuer issues bonds with fixed interest rates • Debt service payments are made to investors based on the fixed interest rates Issuer • Pays Fixed lmcstor • Receives Fixtd Floating to Fixed Rate Swap • Issuer issues floating rate bonds — Investors paid floating rate • Issuer swaps to fixed rate • Issuer's net rate is based on fixed swap rate +/- the difference, if any, between floating bond payment and floating swap receipt Issuer • Pays Fixed • Receives Floating • Pays Investors Floating Fixed Rat Floating Floating Rate Rate Investor • Receives Floating Counterparty • Pays Floating • Receives Fixed Applications • Take advantage of lower fixed swap rates vs.. municipal bond debt • Can be used for advanced refundings R In current markets, issuers can borrow at well below insured municipal rates through use of synthetic fixed rate debt 4