WASHINGTON -- The District of Columbia will save at least $10 million in borrowing costs by using a swap as part of an upcoming $332 million general obligation bond sale designed to eliminate the city's accumulated deficit, the city's top financial officer said.
Ellen M. O'Connor, the city's deputy mayor for finance, said last week the district will go to market with insured, variable-rate obligations, which it will then "swap" with a counterparty to obtain fixed-rate debt service payments. The counterparty will be a firm selected from a list of candidates that responded to an earlier request for qualifications.
Ms. O'Connor said late Friday that the names of the parties that will be in on the deal will probably be announced early this week. "Until all the pieces are nailed down, I would prefer not to announce the parties," she said.
Ms. O'Connor said calculations done by city officials indicate the structure will save the city at least $10 million in debt service costs, as compared with an uninsured, fixed-rate bond issue. The 12-year bonds will be sold by competitive bid and are likely to come to market toward the end of this week, although Ms. O'Connor said the schedule could slip to Sept. 23.
"The many moving parts of this deal require the coordination of a number of parties," she said.
The city's decision to enter into a swap agreement came as Fitch Investors Service Inc. on Wednesday afternoon assigned an A-minus rating to the district's outstanding uninsured GO bonds.
Colleen Woodell, a Fitch senior vice president, said the district's government has shown a dramatic improvement since the arrival of Mayor Sharon Pratt Dixon in January.
"We really see this as a turnaround situation," Ms. Woodell said. "They've made remarkable progress since [Mayor Dixon] took office. Things have really turned around."
Analysts at Standard & Poor's Corp. and Moody's Investors Service said their respective agencies have the city's bond ratings under review, which they will complete after examining all documents relevant to the deficit bond issue. The city's uninsured bonds currently are rated A-minus by Standard & Poor's and Baa by Moody's.
Because the city plans to insure the deficit bonds, the issue likely will receive a triple-A rating from both Standard & Poor's and Moody's. The issue also could receive an AAA from Fitch, though the agency has assigned that rating to only one insurer -- Financial Guaranty Insurance Co. Fitch assigned an AAA rating to FGIC on Sept. 4.
In a report released last week outlining the agency's rationale for its A-minus rating on outstanding district bonds, Fitch stressed progress officials have made in addressing the city's financial pressures. But Fitch also noted that the city is not recession-proof, adding that revenues continue to come in below budgeted levels.
Ms. O'Connor said the Fitch rating "reflects their support and recognition that the district and mayor have made financial stability a top priority. We feel confirmed."
Though the city has decided to enter into a swap agreement in connection with the deficit bond sale, bondholders will not see a difference. The district will pay them a variable rate of interest on the bonds. It also will make a fixed-rate payment to its counterparty in the swap transaction, which, in turn, will pay the city a variable rate tied to a mutually agreed upon index.
The city could come out ahead financially if the variable rate it pays to bondholders is less than the variable rate it is paid by its counterparty. However, rating agency analysts generally frown upon the use of swaps as a means of generating revenue instead of serving as a hedge.
Once the bonds have been paid off at the end of their 12-year maturity, the city will have eliminated its accumulated deficit. The bonds are not being used to fund a current general fund deficit. At present, the city projects it will finish the 1991 fiscal year at the end of this month with a balanced budget.
