Financial Security Assurance Inc. yesterday closed a deal with Swiss Bank Corp. that extends and enlarges the bond insurer's liquidity facility.
FSA's existing $255 million liquidity facility was set to expire in October 1992. The new liquidity supports is for $275 million and will last for five years, expiring in 1996.
The facility serves several purposes for FSA. In event of a claim, the firm could draw upon it for immediate cash needs. It contributes to rating agency calculations of FSA's credit quality. And it reflects the confidence other triple-A institutions have in FSA's claims-paying ability.
John A. Harrison, chief financial officer of FSA, said there is a "correlation" between the increased size of the facility and banks' willingness to back FSA. Originally, the insurer sought $250 million, but demand outweighed supply.
"When the dust settled, we had commitments on $275 million," Mr. Harrison said. "We could either cut people back or take the $275 million. We took the 275."
In addition to Swiss bank as lead agent, triple-A rated Credit Suisse is co-agent and 11 other international banks are participating in the facility. Jiri Huebener, first vice president and head of syndications at Swiss Bank, described the transaction as "oversubscribed" by banks willing to back FSA.
Liquidity facilities are not rated because they provide only ready cash, not credit enhancement. FSA will pay $1.38 million annually for the facility, or 50 basis points.
The fee may appear high, but that is because the banks will derive nearly all of their income from this fee -- rather than from the borrowing rate -- since the facility will rarely if ever be needed, Mr. Harrison said. With facilities where draws are expected, the borrowing rate is higher and the annual, or commitment, fee is slower.
If the facility is drawn upon, FSA will pay the prime rate plus 50 basis points annualized on the amount used for any balances lasting less than 90 days. If it is used for more than 90 days, the rate goes up to prime plus 150 basis points.
The other banks supporting the facility are Banca Commerciale Italiana, Bayerische Landesbank Girozentrale, Canadian Imperial Bank of Commerce, Commerzbank, Daiwa Bank Ltd., Dresdner Bank, Girozentrale Vienna, Hypo Bank, Kredietbank NV, Sanwa Bank Ltd., and Yasuda Trust & Banking Co.
FSA's first line of defense is its $602.5 million investment portfolio of securities and collateral backing the insurer's structured transactions. The liquidity facility allows FSA to maximize the portfolio's value by freeing up funds that otherwise would have to be kept in shortterm cash equivalents.
