The slowdown in derivatives volume continued over the past week as two big deals that were expected to contain derivatives were priced yesterday entirely as fixed-rate bonds.
But a $344 million issue for the Municipal Electric Authority of Georgia was sold with $19 million of derivatives.
A $305 million issue for Puerto Rico and a $136 million issue for Tacoma, Wash., came to market without derivatives.
MEAG and Puerto Rico were big derivatives issuers last year.
"There is all kinds of demand for Puerto Rico paper, making it a good platform for derivatives," one Wall Street official said. "When even they don't have anything, you know you're in a slow market."
The MEAG issue included $19 million of auction-set floating-rate and corresponding inverse floatingrate securities in the 2022 maturity. The use of derivatives saved the issuer 10 basis points, according to Donald Carey, managing director at CS First Boston, senior manager of the issue.
Carey said that First Boston could have included even more derivatives in shorter maturities, but MEAG issued bonds only from 2014 to 2026.
Derivatives professionals cited several causes for the slowdown over the past few weeks. Rising interest rates and volatile market conditions have depressed overall new-issue volume and scared many investors away from derivatives.
Bad publicity about derivatives has also reduced the appetite for structureds securities among mutual fund portfolio managers.
Issuers continue to use swaps for balance sheet management apart from new bond issues, however. "That's where most of the action will be this year, selling swaps directly to issuers doing asset and liability management," one professional said.
More Derivatives Studies
The General Accounting Office's two-year study of the derivatives market, to be released next week, will contain little about the municipal market, sources familiar with the report said.
Although some municipal market participants feared the worst, the text and recommendations of the study make no mention of tax-exempt issuers and investors, sources said.
One lawyer said he was surprised that the report did not discuss municipal swaps. But he noted that "no municipal issuer has been burned by swaps like Procter & Gamble was. They cannot point to a specific transaction gone awry."
A breakdwon of swap volume in the report includes municipal issuers, sources said.
The report could still have a big impact in the pricing and availability of municipal swaps if the study's recommendations on swap dealers are adopted by Congress.
And suitability rules limiting sales of esoteric products could protect some municipalities' pension funds. Ohio municipalities suffered big losses in the mortgage derivatives market last year.
The GAO showed a draft of the study to Wall Street officials last week, but had viewers sign a non-disclosure agreement. The study will be made public next Wednesday.
S&P Volume Report
Standard & Poor's Corp. said the volume of secondary market derivatives transactions that it rated in the first quarter rose 41% from the first quarter of 1993. The growth contrasts with a slight decline in volume in the first quarter reported by Moody's Investors Service, to $1.24 billion from $1.26 billion in 1993.
Standard & Poor's said it rated 60 transactions totaling $1.48 billion in the first quarter, up from 29 deals totaling $1.05 billion last year.
Most secondary market transactions carry only one rating, so the different results may reflect changing market share among the agencies rather than changing derivatives issuance volume.