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 Lock-in Historically Low Bond Rates Now to Preserve Refunding Savings! (It Works for New Money Too!) MUNI RATE LOCK Description A Muni Rate Lock is a hedging vehicle that allows an issuer of tax-exempt debt to lock-in an interest rate at a certain level, thus insulating them against interest rate movements between the purchase date of the Muni Rate Lock and the pricing date of the tax-exempt bonds. The Muni Rate Lock is directly tied to the tax-exempt market and does not expose issuers to taxable/tax-exempt basis risk. The Rate Lock can be tied to either the Bond Buyer Municipal Bond Index (the “BBI”) or the Municipal Market Data (“MMD”) scale. The Muni Rate Lock is a particularly valuable financial tool in today’s interest rate environment where an issuer’s refunding savings targets are marginally achieved, and even a slight movement of interest rates can cause the refunding to go away. Applications For a refunding transaction, the Rate Lock eliminates the risk an issuer assumes by investing both time and money in the preparation of a refunding that cannot be priced until necessary approvals are received and documentation is completed. Likewise, new money issuers can lock-in today’s historically low rates and forego the significant risk associated with an increase of interest rates. Mechanics A Muni Rate Lock works as follows: The issuer executes a Muni Rate Lock agreement specifying an index rate. The index rate will be reflected as a spread to the current market index to cover the cost of the hedge. For example, if pricing for a 3-month rate lock is the MMD high grade scale + 8 basis points and the current MMD 20-year high grade is a 4.90%, the rate in the agreement would be set at 4.98%. The agreement will specify a maturity date, which should be set on or after the expected closing date. However, the agreement may be terminated early if the pricing and closing date are accelerated. At the time the Muni Rate Lock is executed, a basis point value will be established based upon the size of the hedge such that on the termination date the counterparty will either pay to the issuer or receive from the issuer a payment equal to the present value change in the index rate from the levels specified in the Muni Rate Lock rate. The value of a basis point will be specified in the Lock agreement. In the event the Index is lower than the Muni Rate Lock rate on the delivery date, a payment will be due from the issuer to the provider. Subject to bond counsel approval, this amount can be capitalized in the bond issue. In the event the Index is higher than the Muni Rate Lock rate on the delivery date, a payment will be due from the provider to the issuer. This amount can be applied as a source of funds in the bond issue. For more information or indicative pricing, call John Trefethen or Johan Rosenberg at 952-996-0180. Return to News |
