First Union Corp. recently acquired the future investment servicing rights to a $643 million bond issue sold by the Pennsylvania Intergovernmental Cooperation Authority (PICA).
The issue's reserve fund was invested in a guarantee investment contract paying less than the issue's 5.74 percent coupon; PICA was losing about $5 million in interest. So PICA put the servicing business up for sale, which First Union won by offering $7 million.
First Union's Capital Markets Group financed the purchase by selling a similar call on the other side. The bond issue's reserve fund will be invested in a rolling Treasury bill program that matches the yield on the bonds. If rates dip, PICA calls the bonds and reissues them; if they go higher, First Union exercises their option on the servicing rights.