| HOME | CONTACT | PERSONNEL | COMPANY | LINKS | NEWS |
 Guaranteed Investment Contract A Guaranteed Investment Contract ("GIC") is a contract between a municipal entity or 501(c)(3) organization and a financial institution (the "Provider") in which the Provider guarantees a rate of return on bond proceeds deposited under the investment contract. Guaranteed Investment Contracts have proven to satisfy the unique economic, tax and legal requirements associated with the investment of tax-exempt bond proceeds and have been used with increasing frequency among tax-exempt issuers. A GIC offers the preservation of principal, earns a fixed yield, and allows for access to funds with no market risk. A GIC is particularly well suited for construction funds because it allows for full flexibility of draws, thus eliminating any market and/or reinvestment risk if construction draws fluctuate for any reason. GICs can also be used for debt service reserve funds, bond funds, and escrow funds, with draws occurring semi-annually on bond payments dates or as required by the Indenture. The yield on an investment contract will generally exceed the yield on a repurchase agreement by approximately 30 basis points. Guaranteed investment contracts can be structured with varying degrees of security. Typically, the security is provided by requiring the Provider of the GIC to maintain a certain level of long-term credit rating by one or more of the recognized Rating Agencies. The rating requirement for the Provider is often determined by the Indenture or other bond documents. In the event the Provider is downgraded below a certain level (e.g. below the "A" category from Moody's or Standard & Poor's) while the GIC is in place, then the Provider is required to provide additional security such as posting collateral with an independent third-party or assigning the contract to a new provider that both meets the rating requirement and is acceptable to the Issuer. Documentation for a GIC is usually a straight forward contract between the Provider of the GIC and the Trustee and/or the Issuer. Guaranteed Investment Contract with Termination Option Guaranteed Investment Contracts are a common investment vehicle for debt service reserve funds ("DSRFs"). The GIC is a popular investment vehicle because it provides a fixed rate of return, it allows for flexibility of draws that are consistent with most bond documents, and it has downgrade provisions that require the provider to post treasury collateral if it is downgraded below a certain level. In a competitive bidding situation, an issuer may receive a yield on the GIC that is higher than the bond's arbitrage yield. In most instances, this excess yield must be rebated to the Federal Government. Sound Capital Management, Inc. can bid a derivation of the standard GIC, which builds an option into the structure that allows the issuer to terminate the contract for virtually any reason. The bidding process works as follows. Assume an issuer has an arbitrage yield on their bonds equal to 6.00%. Assume further that in the current market an issuer could receive a yield of 6.75% on a GIC. If the termination option is used then the yield on the DSRF GIC would be set at 6.00% (the bond's arbitrage yield) and the additional 75 basis points (.75%) would be used to purchase the longest termination option window through the competitive process. The termination option exercise period would commence on the earliest date acquired and would end on the final maturity date for the bonds. This unique structure allows the issuer to earn the bond's arbitrage yield and use excess yield to purchase additional flexibility. |
