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 Liquidity Put Agreement Under the terms of a Liquidity Put Agreement (LPA), the issuer will purchase a portfolio of Treasury securities which will mature in the amount of the DSRF requirement and provide interest income each year on a semi-annual basis. The portfolio will generally consist of two securities; a premium bond and a discount bond. The amount of each bond will be determined so as to produce an aggregate purchase price of par. In essence, the issuer will own a hybrid long-term Treasury security that pays a semi-annual coupon. If, during the term of the agreement, the issuer experiences a cash flow shortage necessitating a draw on the DSRF, the issuer can put the securities back to the Provider of the LPA and receive a price of par plus accrued interest. Thus, even if interest rates rise and the value of the securities fall, the issuer will always be able to put the securities back to the Provider at par, eliminating the need to mark the portfolio to market and cure any deficiencies. In exchange for this agreement, the Provider will receive a fee based upon the size of the DSRF. This fee can be paid either annually out of DSRF interest or upfront, on a present value basis. If the latter is chosen, the mixture of securities in the DSRF portfolio can be adjusted so that the issuer will have no net out of pocket expense and instead receive a lower rate of return on the DSRF. If the issuer desires to terminate the LPA for reasons other than a credit default (e.g., a refunding or replacement of the DSRF with a surety policy), the issuer may not exercise the put. Instead, the contract will be terminated and the issuer will pay to the Provider the present value of the remaining fees, if any. In the case of a refunding, though, the issuer can usually transfer the LPA on the DSRF to the refunding bond issue and only unwind that portion resulting from a decrease in the DSRF requirement. On a net basis, LPAs can provide municipal issuers with yields based on long-term Treasury yields without the price volatility risk associated with such securities. Additionally, the LPA provides an issuer the structuring flexibility to receive an upfront payment representing the present value of all or a portion of future investment earnings. Certain issuers may find this structure as either an alternative funding source or as a means to capture negative arbitrage in other funds. Because most DSRFs are subject to arbitrage rebate under current law, any earnings above the arbitrage yield can be used to offset negative arbitrage in other funds (e.g., construction fund or capitalized interest fund). In summary, LPAs permit the Trustee, on behalf of the Issuer, to hold a Treasury security with an option to put the security at par in case of a credit event. The par put allows the issuer to carry the security at par, eliminating the need for any mark-up when interest rates move higher. |
