Reinvestment Products
Escrow Contracts
- Open Market Securities
- Forward Delivery Agreements
- State and Local Government Series
- Funding Agreements
- Indexed Contracts
- Investment Agreements
- Bank Investment Agreements (BICs)
- Forward Delivery Agreements
- Guaranteed Investment Contracts (GICs)
- Repurchase Agreements (Repos)
- Liquidity Puts
- Rolling Commercial Paper Programs
- Security Contracts
- Synthetic Surety Agreements
- Variable Rate Contracts
Uncollateralized Investment Agreement/Guaranteed Investment Agreement (GIC)
An Uncollateralized Investment Agreement is a contract with a financial institution such as a bank, insurance company or broker/dealer that guarantees a fixed rate of return on bond proceeds deposited under the Investment Agreement. This type of agreement offers a high degree of flexibility regarding the frequency of withdrawals and amounts of withdrawals. Bond proceeds are deposited into the agreement and the issuer simply draws funds on an as-needed basis. The Uncollateralized Investment Agreement is secured solely upon the credit strength of the contract provider or the unconditional guarantee of the owner institution in cases where a subsidiary is set up to write investment contracts. To add an additional layer of security, the provider is required to post collateral or take some other remedy if its credit rating falls below a certain level. The purpose of posting collateral when a downgrade occurs is to eliminate the likelihood that the issuer will lose any of its invested principal. Since an Uncollateralized Investment Agreement requires collateral to be posted only if a “downgrade event” takes place, the issuer would receive a higher yield compared to a Collateralized Investment Agreement or a Forward Delivery Agreement.
Safety of the Agreement
The Uncollateralized Investment Agreement is backed by the credit strength of the provider or guarantor, so the higher the credit strength of the provider, the safer the agreement. In the case of shorter-term investments such as project funds, these agreements are considered very safe. If the agreement is for a longer-term investment such as a reserve fund, we generally suggest that the issuer only solicit bids from highly rated providers.
Flexibility
An Uncollateralized Investment Agreement allows for unlimited draws and the amount of the draw is fully flexible.
Title and Possession of the Securities
None.
Downgrade Remedy
If the provider of the agreement is downgraded below a certain acceptable standard, the provider will be required to post collateral, assign the agreement to another provider with an acceptable credit rating, or cancel the agreement at Par plus accrued interest and return the funds to the issuer. If collateral is posted the provider would be required to value the securities, at least weekly, to ensure that the collateral level is maintained at an agreed-upon level.
Agreement Termination
In the past, the issuer could terminate the Uncollateralized Investment Agreement at any time without a termination payment being paid. However, with the advent of FASB 133, fewer and fewer providers will agree to an open-ended termination at the issuer’s option. Almost all providers now require a market termination if the issuer wants to terminate the agreement for reasons other than provider downgrade or default. Therefore if interest rates are lower, the issuer will receive a payment and if interest rates are higher, the issuer will owe a payment.
Yield
The issuer generally receives the highest rate of return on this type of agreement.
Collateralized Investment Agreement/Repurchase Agreement
An Investment Agreement can also be collateralized at the outset with US Government or Federal Agency securities. This type of agreement guarantees the issuer a fixed rate of return and it can be written as either a Collateralized Investment Agreement, which is provided by banks, insurance companies and financial institutions, or a Repurchase Agreement (“Repo”), which is provided by securities dealers. Regardless of the name, the agreement operates the same way. The issuer or trustee wires cash from the bond proceeds to the Provider. At the same time, the Provider wires the collateral (US Government or Federal Agency securities) to an independent third party or “Custodial Agent.” The issuer is typically permitted up to four draws per month on a Project Fund. Draws on a Reserve Fund are typically allowed on a semi-annual basis.
Collateral for this type of Agreement consists of securities permitted by the Indenture. The title of that collateral is in the issuer’s name. Typically, an additional margin of security value is required which ranges from 1% to 5% of the principal balance plus accrued interest. The collateral securities are marked-to-market at least weekly to make certain that the required level is maintained. As the value of the securities increases or decreases during the term of the investment agreement, the collateral is adjusted accordingly. In the event of a provider default, the issuer will liquidate the collateral.
Safety of the Agreement
The Collateralized Investment Agreement is considered very safe since it is secured or “collateralized” with US Government or US Federal Agency securities. Requiring collateral for an investment agreement also allows the provider to have a lower minimum rating requirement than that of an uncollateralized agreement. This can be useful if an issuer wants to broaden the field of firms that could bid in the investment agreement.
Flexibility
A Collateralized Investment Agreement allows for up to four draws per month and the amount of the draw is fully flexible.
Title and Possession of the Securities
The issuer has title and an independent Custodial Agent has possession of the securities.
Downgrade Remedy
If the provider of the agreement gets downgraded below a certain acceptable standard, the provider will be required to post additional collateral, assign the agreement to another provider with an acceptable credit rating, or cancel the agreement and return the funds (principal plus accrued interest) to the issuer.
Agreement Termination
If the issuer wants to terminate the agreement for a reason other than provider downgrade or default, the contract will be terminated at market value.
Yield
The issuer generally receives a lower rate of return on this type of agreement compared to the Uncollateralized Agreement. The type of collateral used for this type of agreement can also affect the yield. If Treasuries are used as collateral, the rate will be lower than if Agencies are used as collateral.
Forward Delivery Agreement/Forward Purchase Agreement
The Forward Delivery Agreement (“FDA”) is an agreement with a financial institution that provides a fixed rate of return and requires the financial institution to deliver securities in exchange for cash on a predetermined schedule such as a debt service fund schedule or construction fund draw schedule. Specifically, the FDA works as follows: In exchange for cash, the FDA provider delivers securities (consisting of treasuries, agencies and/or commercial paper) to the Trustee equaling the initial value of the construction fund. Three days prior to the last day of the month (the maturity date), the Trustee notifies the provider of the cash amount it needs for construction purposes. On the maturity date, in exchange for cash resulting from the maturing securities, the FDA provider delivers new securities equaling the value of the construction fund less the amount needed by the Trustee plus any interest it has earned. This exchange cycle continues until the construction fund is depleted or the agreement matures, whichever occurs first. The yield on the FDA is fixed for the term of the agreement. Because the Trustee is always in possession of either cash or the securities, this type of agreement is considered to be very safe.
Safety of the Agreement
The Forward Delivery Agreement is backed by the value of the securities being delivered. If the underlying securities are Treasury Bills, Notes, Bonds or Strips, they are guaranteed by the US government, if Agencies, they are backed by the particular issuing agency of the US government, and if Commercial Paper, they are backed by the credit of the issuing company (we only suggest using Commercial Paper rated in the highest category by S&P and Moody’s (A1/P1)).
Flexibility
A Forward Delivery Agreement allows one draw per month on the last day of the month or semi-annual draws for a Reserve Fund. The amount of the draw is fully flexible.
Title and Possession of the Securities
The title of the securities is in the Issuer’s name. The Trustee or other authorized independent third-party, as agent for Trustee, is always in possession of the securities or cash.
Downgrade Remedy
If the provider of the agreement gets downgraded below a certain acceptable standard, the agreement will either be assigned to another provider of acceptable rating or cancelled.
Agreement Termination
If the issuer wants to terminate the agreement for any reason other than for a provider downgrade or default, the contract will be terminated at market value.
Yield
The Forward Delivery Agreement provides a lower rate of return than the Uncollateralized Investment Agreement and higher rate of return than the Collateralized Agreement. Similar to the Collateralized Investment Agreement, the type of securities allowed to be used for this type of agreement will affect the yield. The highest rate of return is provided by using Commercial Paper as security, Agencies provide the next highest, and Treasuries provide the lowest rate of return.