Something new for muni issuers: currency swaps, a handy guide.

Municipal issuers don't make a habit of it, but a few have tried their hand at the currency swap. In a currency swap, one of the most common outside the municipal market, a party and counterparty each agree to make periodic interest payments, with each using a different currency.

Unlike most interest rate swaps, one side does not necessarily have to pay interest at a fixed rate and the other at a floating rate. And while the interest payments are based on a principal amount, a trait shared with other swaps, the principal amount may be exchanged at the outset and again at maturity.

For example, a U.S. corporation that has operations in Japan may issue all of its debt in the U.S. market. The money the company borrows is denominated in dollars, but it may be needed to make capital expenditures in Japan. And the profits from the Japanese operation may be needed to make interest payments on the U.S. debt.

Without a swap, the company is exposed to currency risk. If, after the debt is sold but before the new plant is built, the dollar declines in value against the yen, the company will have less money available from the borrowing to spend on the expansion.

The company can hedge this risk by entering a currency swap when it issues debt, perhaps a $100 million three-year bond with a fixed-rate coupon of 8%.

The company would give the $100 million to a swap counterparty. The counterparty would give the company the equivalent mount of yen -- about 100 billion yen today.

For the next three years, the parties will exchange interest payments as well. If both sides choose to pay a fixed rate, the company would pay 8% of 100 billion yen and the counterparty would pay 8% of $100 million.

When the swap matures, the counterparty will repay the company $100 million and the company will pay the counterparty 100 billion yen.

If the value of the yen has risen over the three years, the company faces a loss at maturity because it's. still getting just $100 million for its 100 billion yen. But that loss is offset by the rise in value of the yen-denominated income the company receives from its new Japanese plant.

And if the value of the yen declines, the company faces a profit on the swap but receives less valuable income from its Japanese plant.

Municipalities have used currency swaps in conjunction with yen-denominated bond issues. The issuers sold bonds to Japanese investors that pay interest in yen. To avoid exposing themselves to currency risk, the issuers entered swaps to transform their yen liability back into dollars.

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