Alternative Variable Rate Products

Transcription

1 Alternative Variable Rate Products September 16, 2011

2 Summary of Alternative Variable Rate Products External Liquidity Products Market Access Liquidity Products Investor Liquidity Products Variable Rate Demand Bonds with LOC / SBPA (VRDBs) SIFMA Index Bonds (Hard Put / Maturity) SIFMA Index Bonds (Soft Put) Revolving Loan LIBOR Index Bonds (Hard Put / Maturity) LIBOR Index Bonds (Soft Put) Direct Placement Synthetic Floating Rolling Tender Variable Rate Demand Bonds (RTVs) Windows 2

3 Comparison of Variable Rate Products Comparison of Key Provisions for VRDBs, Private Placement, SIFMA Index Bonds and RTVs / Windows LOC/SBPA-Backed VRDBs Private Placement SIFMA Notes RTVs / Windows Commitment Period 1 to 3 years 1 to 3 years 1 to 7 years 7 months Event of Failed Remarketing Ongoing Exposure to Bank Credit Exposure to Issuer s Credit Payment Frequency VRDBs become bank bonds, subject to bank rate and acceleration provisions Specific to private placement terms; similar to LOCs / SBPAs Hard put / maturity: Default Soft put: Penalty rate Ongoing exposure to individual bank performance Limited exposure None None Cost increases in the event of downgrades Resets weekly, paid monthly Cost increases in the event of downgrades Resets weekly, paid monthly Primary Investors Money market funds Held by Bank Call Option Continuously callable, though bank facility breakage fees may apply Continuously callable, though breakage fees may apply No cost impact of downgrade Resets weekly, paid monthly Less than 13 months: Money market funds; Greater than 13 months: Intermediate term bond funds Typically callable three to six months prior to maturity with no penalty 7 month extension period Cost increases in the event of downgrades Resets weekly, paid monthly Money market funds Continuously callable and callable continuously during extension period 3

4 SIFMA Index Bonds: Index-Based Committed Capital SIFMA Index Bonds feature a fixed spread to SIFMA through maturity / mandatory tender in 1 to 7 years The Adjusted SIFMA Rate is determined by weekly SIFMA resets plus the fixed spread Bonds are subject to optional redemption 3 to 6 months prior to maturity to achieve market access based ratings Bonds structured with a hard maturity rather than a mandatory tender achieve better pricing beyond 13 months After the bonds mature, the Issuer can refund them with either fixed or floating rate bonds The bonds can usually be integrated with existing interest rate swaps SIFMA Index Bonds: Mechanics of the Remarketing Process Sell SIFMA Index Bond At or prior to maturity (1 to 7 years), the Issuer can refund the bonds into fixed or variable rate bonds Final Maturity Today SIFMA + Spread Maturity/ Mandatory Tender Fixed or Floating Refunding Bonds 4

5 RTVs: Weekly VRDBs with an Extension Period RTVs have the same interest payment mechanics as traditional VRDBs If RTVs are tendered and cannot be remarketed, rather than accessing a bank facility (or an Issuer s liquidity), the Issuer has a 7 to 9-month Extension Period Investors are compensated during the Extension Period through a preset formulaic interest rate (the Extension Rate ), which is lower than typical Bank Bond Rates on VRDBs RTVs: Mechanics of the Remarketing Process Investor exercises optional tender Remarketing Window Beginning of Extension Period Extension Period Mandatory Purchase Date (Until 1 st of Next Month) (7 months) 1. Investor exercises an Optional Tender for Purchase at any time 2. Remarketing Agent has 7 (or more) Calendar Days to find another investor at par; Weekly Rates continue to reset on each Thursday 3. If no new investor can be found by the first business day of the following month, the tendered RTVs enter an Extension Period and bear interest at the preset Extension Rate 4. If the tendered RTVs cannot be remarketed on any subsequent Interest Payment Date by the 7 th month, all RTVs in an Extension Period must be converted to another mode 5

6 Comparison of Indicative Funding Costs Generic AA-Rated California Issue Comparison of Indicative Funding Costs Current Market Conditions Assuming Generic AA-Rated California Issue VRDBs Direct Purchase 1Y SIFMA Note 3Y SIFMA Bond RTVs / Windows Indicative Interest Rate SIFMA 5 bps bps 0-5 bps bps 5-15 bps Commitment Period 3 Year 3 Year 1 Year 3 Year 7 Months Up-Front Cost (Annualized) (1) 10 bps 23 bps 14 bps 5 bps Liquidity / Credit Enhancement 50 bps Remarketing Fees 7 bps 15 bps Net Cost 62 bps bps bps bps bps (1) Upfront Costs annualized to maturity (assumes VRDBs require new liquidity facility at the end of the 1 to 3 year term; assumes RTVs are not refunded prior to maturity); assumes cost of issuance of $100,000 for the 1Y Note, and $150,000 for all other products; assumes takedowns as follows: $1.25 per bond for the VRDBs; $2.50 / bond for RTVs (shown above); $5.00 / bond for Windows (not shown above); $1.25 / bond, $2.00 / bond, $2.50 / bond, $3.00 / bond and $3.50 / bond for the 1 through 5 year SIFMA index bonds, respectively. 6