Derivatives activity in the new issues market was fairly light for the week. Syndicate officials said issuers were less interested in using derivatives structures since rates are at historically low levels.

"Frankly, with absolute rates where they are, there is less interest," said Rick Kolman, manager of the underwriting desk at Goldman, Sachs & Co.

However, a lot of activity is still happening behind the scenes in the swap market.

One derivatives professional said many issuers are moving to refinance floating-rate debt issued in the 1980s with ordinary fixed-rate debt to lock in today's low fixed rates.

But the same issuers still have assets invested at floating rates, like large cash balances in money market funds. Several such issuers, including hospitals and universities, have been going to the swap market after issuing fixed-rate debt and creating synthetic variable-rate debt.

In such a transaction, the issuer enters a swap and agrees to pay a variable rate, while the swap counterparty agrees to pay a fixed rate. This allows the issuer to create some exposure to floating rates to match their own assets invested at floating rates.

The swaps are generally in the five-year range. The derivatives professional said issuers can pick up 50 to 60 basis points by choosing the five-year rate over the three-year rate. The move to 10-years brings only an additional 50 to 60 basis points.

"The swap curve is steepest from one to five years, so that seems to be where issuers see the most value," the professional said.

The fixed-rate bonds carry longer maturities. Thus, the issuers have limited their exposure to floating rates, and if such rates spike upwards again, issuers will be able to unwind the swaps.

If the issuers had entered into longer maturity swaps, unwinding or hedging the swaps would be more expensive.

There was some new issue activity linked to the long-dated swap market. The Water Authority of Great Neck, N.Y., sold $30 million of longterm put bonds through Lehman Brothers.

The water authority issued variable-rate refunding bonds due in 2020 with an average life of 23 to 24 years. The variable rate on the bonds is reset weekly, with Lehman acting as the remarketing agent. Financial Guaranty Insurance Corp. provided insurance and liquidity support under its Securities Purchase Inc. subsidiary.

The water authority then entered a swap with Lehman, creating a synthetic fixed rate 22 basis points lower than the authority could have received on an ordinary issue. The added savings boosted the present value savings of the refunding by $500,000 to a total of $ 1.1 million, Lehman officials said.

Although some market sources had speculated that the deal would be the first to include insurance of a swap provider's obligation, FGIC did not insure Lehman's obligation under the swap.

But to provide additional comfort to the authority, Lehman included a collateral agreement. If Lehman's payment based on the variable rate ever exceeds the fixed rate it is receiving from the authority, Lehman will post collateral with a third party.

The collateral, generally in the form of Treasury securities, would pass to the authority if Lehman were then unable to fulfill its obligation under the swap.

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