Bank of America has jumped into the expanding business of providing long-dated municipal swaps, the bank announced yesterday,
The San Francisco-based bank has slowly grown its municipal finance effort since hiring Anthony Taddey, a banker with 20 years of experience, from Morgan Stanley & Co. in January 1993. In March of this year, the bank was named senior manager on California's upcoming note sale, which could be as large as $8 billion.
A leading derivatives dealer in the taxable market, Bank of America will offer tax-exempt issuers swaps longer than 15 years, including a complete package for lowering debt service costs using a synthetic fixed-rate structure.
Officials at the bank were not available for comment yesterday.
In a synthetic fixed-rate deal, an issuer sells long-term variable-rate bonds. Bank of America would provide liquidity support and remarketing services for the bonds.
The issuer simultaneously enters a swap with the bank covering the floating-rate payments in return for a fixed-rate payment that is lower than the rate the issuer would pay on fixed-rate debt.
Only a handful of firms offer longterm municipal swaps that include some form of guaranteed liquidity backing. Many municipalities were burned in the 1980s when Japanese banks providing liquidity support on variable-rate bonds were downgraded and the cost of finding alternate providers rose.
AIG Financial Products, the triple-A-rated subsidiary of insurance giant American International Group Inc., pioneered the long-term synthetic fixed-rate structure in 1991, with Smith Barney Shearson handling the bond sales. AIG provides a liquidity guarantee that caps the price a municipality will have to pay for liquidity.
In the past year, Societe Generate, double-A rated, and TMG Financial Products, affiliated with triple-A-rated Mutual Life Assurance of Canada, have begun offering similar products. J.P. Morgan & Co., also triple-A rated, offers swaps including guaranteed liquidity support.
AMBAC Indemnity Corp. hopes to unveil a similar product later this year, market sources said. AMBAC officials declined to comment.
Both AMBAC and Societe Generale have hired swap professionals from Smith Barney who are familiar with the AIG structure.
All of the existing providers are higher rated than Bank of America, which is rated A-plus by Standard & Poor's Corp. and Aa3 by Moody's Investors Service. But officials said they hope to capitalize on the bank's relationships with California issuers. The bank will also offer collateralization provisions to assuage issuers worried about credit.
Several single-A-rated Wall Street firms have entered long-dated swaps, including Lehman Brothers and Merrill Lynch & Co., but without liquidity backing. Lehman, for example, has issuers sell floating-rate bonds that are reset at a periodic auction and do not require liquidity backing. The firms also have triple-A-rated swap subsidiaries for credit-sensitive customers.
