The derivatives market is gearing up for the storm after the lull.
Although there have been few issues of primary market derivatives in recent weeks, yesterday's New York City Municipal Water Finance Authority issue included $160 million of derivatives.
And next week's New York City general obligation issue may contain even more, market sources say.
Competitive pricing is also creeping into the derivatives area. A Massachusetts issue expected next week could include $120 million of competitively priced short-term floating-rate notes linked to the Public Securities Association's swap index. In December, New Jersey may issue $250 million of the PSA notes competitively.
On both deals, the issuers will compare competitive bids on the PSA notes to yields available on straight fixed-rate bonds. "They could go either way, depending on the market," one derivatives professional said.
The $823 million refunding by the New York water authority was priced yesterday. The fixed-rate issue, with derivatives, will be followed by a $200 million variable-rate portion including liquidity support from the Securities Purchase Inc. subsidiary of Financial Guaranty Insurance Corp.
Senior manager Smith Barney Shearson Inc. structured over $150 million of the deal as auction-rate and corresponding inverse floating-rate securities, carrying insurance from Municipal Bond Investors Assurance Corp. The city saved 10 basis points over issuing ordinary insured bonds in the 2008, 2009, and 2013 maturities, officials on the deal said.
The GO deal set for next week by New York City may or may not include derivatives, but Wall Street certainly has a few ideas. Officials at six firms said they were working on derivatives proposals, some in the secondary market, for the upcoming deal. Responses to the city's "request for proposals" on derivatives are due Thursday. Goldman will be senior manager.
Philadelphia is considering two derivatives transactions, according to city Treasurer Kathryn J. Engebretson.
After refinancing over $3 billion of outstanding debt, Philadelphia does not have much left to refinance. Some airport bonds, however, cannot be advance refunded, so the city is considering a forward swap, Engebretson said at The Bond Buyer's municipal analysts conference on Monday.
Detroit executed a similar transaction with Goldman, Sachs & Co. and Merrill Lynch last week.
In a forward swap, the city agrees to issue variable-rate bonds in several years when the airport bonds are callable. The city locks in a fixed rate by setting down the terms now of an accompanying swap that would be entered when the bonds are sold.
The city would also like to raise its exposure to floating rates, Engebretson said. In August the city sold $1.2 billion of water and wastewater revenue bonds. Although about $150 million was structured as derivatives,. the remainder was sold as fixed-rate debt.
But Engebretson said some variable-rate exposure would be appropriate for the water bonds. The city did not issue straight variable-rate bonds in August because of the high cost of credit enhancement.
So the city is considering swapping some of its fixed-rate obligations into floating-rate exposure using a swap.
